`[Federal Register Volume 90, Number 6 (Friday, January 10, 2025)]
[Rules and Regulations]
[Pages 2434-2548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30628]



[[Page 2433]]

Vol. 90

Friday,

No. 6

January 10, 2025

Part VI





Consumer Financial Protection Bureau





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12 CFR Part 1026





Residential Property Assessed Clean Energy Financing (Regulation Z); 
Final Rule

  Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules 
and Regulations  

[[Page 2434]]


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CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Part 1026

[Docket No. CFPB-2023-0029]
RIN 3170-AA84


Residential Property Assessed Clean Energy Financing (Regulation 
Z)

AGENCY: Consumer Financial Protection Bureau.

ACTION: Final rule.

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SUMMARY: Section 307 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (EGRRCPA) directs the Consumer Financial 
Protection Bureau (CFPB or Bureau) to prescribe ability-to-repay rules 
for Property Assessed Clean Energy (PACE) financing and to apply the 
civil liability provisions of the Truth in Lending Act (TILA) for 
violations. PACE financing is financing to cover the costs of home 
improvements that results in a tax assessment on the real property of 
the consumer. In this final rule, the CFPB implements EGRRCPA section 
307 and amends Regulation Z to address how TILA applies to PACE 
transactions.

DATES: This final rule is effective March 1, 2026.

FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory 
Implementation and Guidance Program Analyst, Office of Regulations, at 
202-435-7700 or https://reginquiries.consumerfinance.gov/. If you 
require this document in an alternative electronic format, please 
contact [email protected].

SUPPLEMENTARY INFORMATION:

Abbreviations

    The following abbreviations are used in this final rule:

 APOR = Average Prime Offer Rate
 APR = Annual Percentage Rate
 Board = Board of Governors of the Federal Reserve System
 CAEATFA = California Alternative Energy and Advanced 
Transportation Financing Authority
 California DFPI = California Department of Financial 
Protection and Innovation
 CARES Act = Coronavirus Aid, Relief, and Economic Security 
Act
 EGRRCPA = Economic Growth, Regulatory Relief, and Consumer 
Protection Act
 FDIC = Federal Deposit Insurance Corporation
 FHA = Federal Housing Administration
 FHFA = Federal Housing Finance Agency
 FRFA = Final Regulatory Flexibility Analysis
 FTC = Federal Trade Commission
 HOEPA = Home Ownership and Equity Protection Act
 HUD = U.S. Department of Housing and Urban Development
 IRFA = Initial Regulatory Flexibility Analysis
 LTV = Loan to Value
 OCC = Office of the Comptroller of the Currency
 NCUA = National Credit Union Administration
 NEPA = National Environmental Policy Act
 NPRM = Notice of Proposed Rulemaking
 PACE = Property Assessed Clean Energy
 PACE Report = Property Assessed Clean Energy (PACE) 
Financing and Consumer Financial Outcomes, a CFPB report published 
on May 1, 2023
 RESPA = Real Estate Settlement Procedures Act
 RFA = Regulatory Flexibility Act
 TILA = Truth in Lending Act

I. Summary of the Final Rule

    Section 307 of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA) directs the CFPB to prescribe ability-to-repay 
rules for Property Assessed Clean Energy (PACE) financing and to apply 
the civil liability provisions of the Truth in Lending Act (TILA) for 
violations.\1\ In this final rule, the CFPB implements EGRRCPA section 
307 and amends Regulation Z to address the application of TILA to 
``PACE transactions'' as defined in Sec.  1026.43(b)(15).
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    \1\ 15 U.S.C. 1639c(b)(3)(C).
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    This final rule:
     Clarifies an existing exclusion to Regulation Z's 
definition of credit that relates to tax liens and tax assessments. 
Specifically, the CFPB is clarifying that the commentary's exclusion of 
tax liens and tax assessments from being ``credit,'' as defined in 
Sec.  1026.2(a)(14), applies only to involuntary tax liens and 
involuntary tax assessments.
     Makes a number of adjustments to the requirements for Loan 
Estimates and Closing Disclosures under Sec. Sec.  1026.37 and 1026.38 
that will apply when those disclosures are provided for PACE 
transactions, including:
    [cir] Eliminating certain fields relating to escrow account 
information;
    [cir] Requiring the disclosure of other fees and amounts not 
included in the principal and interest on the projected payments table 
in place of disclosure of mortgage insurance premiums;
    [cir] Requiring the PACE transaction and other property tax payment 
obligations to be identified as separate components of estimated taxes, 
insurance, and assessments;
    [cir] Clarifying certain implications of the PACE transaction on 
the property taxes;
    [cir] Requiring disclosure of identifying information for the PACE 
company;
    [cir] Requiring various qualitative disclosures for PACE 
transactions that will replace disclosures on the current forms, 
including disclosures relating to assumption, late payment, servicing, 
partial payment policy, and the consumer's liability after foreclosure; 
and
    [cir] Clarifying how unit-periods will be disclosed for PACE 
transactions.
     Provides new model forms under H-24(H) and H-25(K) of 
appendix H for the Loan Estimate and Closing Disclosure, respectively, 
specifically designed for PACE transactions, as well as Spanish 
translations of those model forms under H-28(K) for the Loan Estimate 
and H-28(L) for the Closing Disclosure.
     Exempts PACE transactions from the requirement to 
establish escrow accounts for certain higher-priced mortgage loans, 
under Sec.  1026.35(b)(2)(i)(E).
     Exempts PACE transactions from the requirement to provide 
periodic statements, under Sec.  1026.41(e)(7).
     Applies Regulation Z's ability-to-repay requirements in 
Sec.  1026.43 to PACE transactions with a number of adjustments to 
account for the unique nature of PACE financing, including requiring 
PACE creditors to consider certain monthly payments that they know or 
have reason to know the consumer will have to pay into the consumer's 
escrow account as an additional factor when making a repayment ability 
determination for PACE transactions extended to consumers who pay their 
property taxes through an escrow account on their existing mortgage.
     Provides that a PACE transaction is not a qualified 
mortgage as defined in Sec.  1026.43.
     Extends the ability-to-repay requirements, as well as TILA 
section 130, to any ``PACE company,'' as defined in Sec.  
1026.43(b)(14), that is substantially involved in making the credit 
decision for a PACE transaction.
     Provides clarification regarding how PACE and non-PACE 
mortgage creditors should consider pre-existing PACE transactions when 
originating new mortgage loans.

II. Background

A. PACE Financing Market Overview

How does PACE financing work?
    PACE financing enables property owners to finance upgrades to real 
property through an assessment on their real property.\2\ Eligible 
upgrade types

[[Page 2435]]

vary by locality but often include upgrades to promote energy 
efficiency or to help prepare for natural disasters. The voluntary 
financing agreements are made between the consumer and the consumer's 
local government or a government entity operating with the authority of 
several local governments,\3\ and they leverage the property tax system 
for administration of payments. PACE financing is repaid through the 
property tax system alongside the consumer's other property tax payment 
obligations. PACE loans are typically collected through the same 
process as real property taxes.\4\ Local governments typically fund 
PACE loans through bond issuance. PACE assessments are sometimes 
collateralized and sold as securitized obligations.
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    \2\ Some States authorize PACE financing for residential and 
commercial property. In this final rule, the term PACE financing 
refers only to residential PACE financing unless otherwise 
indicated.
    \3\ Although PACE financing programs may be sponsored by 
individual local governments, many are sponsored by 
intergovernmental organizations whose membership consists of 
multiple local governments.
    \4\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat. 
sec. 163.081(1)(e); Fla. Stat. sec. 197.3632(8)(a); Mo. Stat. sec. 
67.2815(5).
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    PACE loans are secured by a lien on the consumer's real property. 
The liens securing PACE loans typically have priority under State law 
similar to that of other real property tax liens, which are superior to 
other mortgage liens on the property, including those that predated the 
PACE lien.\5\ In a foreclosure sale, this super-priority lien position 
means that any amount due on the PACE loan is paid with the foreclosure 
sale proceeds before any proceeds will flow to other liens. The PACE 
loan is tied to the property, not the property owner. As such, the 
repayment obligation remains with the property when property ownership 
transfers unless paid off at the time of sale.
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    \5\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30 (providing 
for ``the collection of assessments in the same manner and at the 
same time as the general taxes of the city or county on real 
property, unless another procedure has been authorized by the 
legislative body or by statute . . . .''); Fla. Stat. sec. 
163.081(7) (``The recorded agreement must provide constructive 
notice that the non-ad valorem assessment to be levied on the 
property constitutes a lien of equal dignity to county taxes and 
assessments from the date of recordation.''). However, authorizing 
statutes in some States provide for subordinated-lien status for 
PACE financing. See, e.g., Minn. Stat. sec. 216C.437(4); Me. Stat. 
tit. 35A sec. 10156(3), (4); 24 V.S.A. sec. 3255(b). The CFPB 
understands that there has been little to no loan volume in these 
programs. See, e.g., Efficiency Maine, FY2024 Annual Report, at 40, 
https://www.efficiencymaine.com/docs/FY2024-Annual-Report.pdf.
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    Although some local governments operate PACE financing programs 
directly, most contract with private PACE companies to operate the 
programs. These private companies generally handle the day-to-day 
operations, including tasks such as marketing PACE financing to 
consumers, training home improvement contractors to sell PACE financing 
to consumers, overseeing originations, performing underwriting, and 
making decisions about whether to extend the loan. The PACE companies 
may also contract with third-party companies to administer different 
aspects of the loans after origination. Often, PACE companies purchase 
PACE bonds that are issued by local governments to fund the programs, 
which generate revenue for the PACE companies from interest on consumer 
payments. PACE companies are also sometimes involved in securitizing 
the bond obligations for sale as asset-backed securities. Additionally, 
PACE companies frequently earn various fees related to the 
transactions.\6\
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    \6\ See, e.g., Energy Programs Consortium, R-PACE, Residential 
Property Assessed Clean Energy, A Primer for State and Local Energy 
Officials (Mar. 2017), https://web.archive.org/web/20201030223231/http:/www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf.
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    PACE companies often rely heavily on home improvement contractors 
to sell PACE loans to consumers and facilitate their origination. Home 
improvement contractors frequently market PACE financing directly to 
consumers while selling their home improvement services, often door-to-
door. They often serve as the primary point of contact with consumers 
during the origination process and collect application information that 
the PACE companies use to make underwriting and eligibility 
determinations. The contractors may also deliver disclosures relating 
to the PACE transaction and obtain the consumer's signature on the 
financing agreement.
Origin and Growth of PACE Programs
    In 2008, California passed Assembly Bill no. 811 to enable the 
first PACE programs. The CFPB is aware of 19 States plus the District 
of Columbia that currently have enabling legislation for residential 
PACE financing programs, but only a small number of States have had 
active programs, primarily California, Florida, and Missouri.\7\
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    \7\ There has been pilot program activity for residential PACE 
financing in some States. See, e.g., DevelopOhio, Lucas County PACE 
program benefits homeowners (Aug. 16, 2019), https://www.brickergraydon.com/DevelopOhio/Lucas-County-PACE-program-benefits-homeowners. Some States that previously authorized 
residential PACE financing programs have amended their statutes such 
that PACE financing is no longer authorized for single-family 
residential properties. See, e.g., 2021 Wis. Act 175 (codified at 
Wis. Stat. sec. 66.0627).
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    During the early years of PACE financing, lending activity appears 
to have been relatively limited, with cumulative obligations of around 
$200 million through 2013.\8\ In 2014, PACE financing activity 
accelerated, peaking in 2016 with over $1.7 billion in investment.\9\ 
This level of activity was maintained in 2017, but it declined between 
2018 and 2021, dropping to an average investment of $769 million per 
year during those years.\10\ Overall, as of December 31, 2023, the PACE 
financing industry had financed 371,000 home upgrades, totaling over 
$9.1 billion.\11\
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    \8\ See PACENation, Market Data, https://www.pacenation.org/pace-market-data/ (last visited Mar. 30, 2023).
    \9\ See id.
    \10\ See id. The latest data available on the PACE financing 
industry trade association's website is for 2023.
    \11\ See id.
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Common Financing Terms
    According to data analyzed in a report that the CFPB released 
concurrently with its PACE proposal (PACE Report), the term of PACE 
loans that were originated between July 2014 and December 2019 was most 
often 20 years, but ranged between five and 30 years.\12\ The Report 
also finds that the interest rates for those loans clustered around 7 
to 8 percent with annual percentage rates (APRs) averaging 
approximately a percentage point higher.\13\ For reference, the average 
prime offer rate for primary mortgage loans was around 3.5 percent for 
most of the period studied in the PACE Report.\14\ Fees vary by PACE 
program, but the CFPB has reviewed agreements that include fees for 
application, origination, tax administration, lien recordation, title, 
escrow, bond counsel, processing, underwriting, and fund disbursement. 
The CFPB is not aware of any PACE obligations that are open-end or have 
a negative-amortization feature.
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    \12\ See CFPB, PACE Financing and Consumer Financial Outcomes at 
Table 2 (May 2023), https://files.consumerfinance.gov/f/documents/cfpb_pace-rulemaking-report_2023-04.pdf. (PACE Report). The PACE 
Report is discussed in more detail in part II.B.
    \13\ Id.
    \14\ See id. at 13.
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Consumer Protection Concerns
    The structure of PACE transactions carries certain unique risks for 
consumers. Primarily, the risks are due to the fact that PACE companies 
and secondary-market participants face very low repayment risk, 
regardless of whether consumers can repay.\15\ If a

[[Page 2436]]

house with a PACE lien is sold through foreclosure or tax sale, the 
sale proceeds are generally assured to cover the outstanding amounts 
owed on the PACE transaction because PACE loan amounts are a fraction 
of the value of the property, the loans do not accelerate, and the 
super-priority lien means that amounts due are paid before other 
mortgage debts. Additionally, because PACE loans do not accelerate, the 
remaining balance will stay with the property for the next homeowner to 
pay under the terms of the original financing agreement.
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    \15\ See, e.g., Morningstar, DBRS, Rating U.S. Property Assessed 
Clean Energy (PACE) Securitizations, Aug. 2024, at 19, 20, app. A 
(``Given the seniority of the amortizing PACE lien and corresponding 
low [loan-to-value], in the vast majority of cases, we typically 
assume the liquidation proceeds from a foreclosure sale are 
sufficient to bring the [residential] PACE Assessment current. Based 
on this assumption, a main credit risk to [residential] PACE ABS 
transactions is a delay in cash flow receipts related to nonpayment 
of the R-PACE Assessments over some period of time. . . . For 
[residential] PACE Assessments that go through the foreclosure 
process, once the process has concluded and the property sold, the 
[residential] PACE Assessment is typically considered reperforming/
performing, and collections resume according to the original 
amortization schedule. Furthermore, the new property owner is 
subject to subsequent to default. The same process is then applied 
to the second and subsequent round of delinquency until the 
[residential] PACE Assessments are paid in full.'').
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    Consumer groups have stated that PACE companies and home 
improvement contractors originate PACE loans quickly, often on the 
spot, without regard to affordability or consumer understanding. They 
have reported to the CFPB, including in comments to the proposed rule, 
deceptive sales tactics, aggressive sales practices, and fraud. A 
number of PACE industry stakeholders acknowledged in comments to the 
proposal that some consumers experienced mistreatment before many of 
the current consumer protection laws and practices were put in place.
    Consumer advocates have criticized other aspects of PACE financing 
as well, such as the high cost of funding compared to other mortgage 
debt, excessive capitalized fees, and inadequate disclosures. They have 
argued that these aspects of PACE transactions can cause unexpected and 
unaffordable tax payment spikes that can lead to delinquency, late 
fees, tax defaults, and foreclosure actions.\16\ Some local officials 
have echoed some of these concerns in discussions with CFPB staff.
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    \16\ See, e.g., Nat'l Consumer L. Ctr., Residential (PACE) 
Loans: The Perils of Easy Money for Clean Energy Improvements (Sept. 
2017), https://www.nclc.org/images/pdf/energy_utility_telecom/pace/ib-pace-stories.pdf; see also Off. of the Dist. Att'y, Cnty. of 
Riverside, News Release, District Attorneys Announce $4 Million 
Consumer Protection Settlement (Aug. 9, 2019), https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement; Kirsten Grind, America's 
Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis, 
Wall St. J. (Jan. 10, 2017), https://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984.
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    The CFPB's PACE Report, discussed under parts II.B and VI.C, bears 
out some of these concerns. According to the Report, PACE loans 
originated between 2014 and 2019 increased consumers' property tax 
bills by about $2,700 per year on average, an average increase of about 
88 percent.\17\ The Report also finds that getting a PACE loan 
increased mortgage delinquency rates for consumers who had a pre-
existing non-PACE mortgage by 2.5 percentage points over a two-year 
period following the PACE origination, which represents an increased 
risk of a mortgage delinquency by about 35 percent over two years.\18\
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    \17\ See PACE Report at 4.
    \18\ See id. at 3.
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    Additionally, consumer advocates have expressed concern that some 
home improvement contractors involved in the origination of PACE 
transactions provide consumers with misleading information about 
potential energy savings or promote the most expensive energy 
improvements, regardless of their actual energy conservation 
benefits.\19\ They have noted that such practices could result in 
homeowners receiving a smaller reduction in their utility bills than 
anticipated, making PACE financing payments more difficult to afford. 
Consumer advocates have also alleged that PACE financing is 
disproportionately targeted at older Americans, consumers with limited 
English proficiency or lower incomes, and consumers in predominantly 
Black or Hispanic neighborhoods.
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    \19\ See Claudia Polsky, Claire Christensen, Kristen Ho, Melanie 
Ho & Christina Ismailos, The Darkside of the Sun: How PACE Financing 
Has Under-Delivered Green Benefits and Harmed Low Income Homeowners, 
Berkeley L., Env't L. Clinic, at 8-13 (Feb. 2021), https://www.law.berkeley.edu/wp-content/uploads/2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf.
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    These advocates and mortgage-industry stakeholders have also 
highlighted that, although a PACE loan technically remains with the 
property at sale, most home buyers are unwilling to take on the 
remaining payment obligation for a PACE lien, or their mortgage lender 
prohibits them from doing so.\20\ Consumer advocates have reported that 
PACE consumers are often unaware of these issues when agreeing to the 
financing, which causes an unanticipated financial burden when 
consumers are required to pay off the PACE loan to complete a home 
sale.
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    \20\ See Freddie Mac, Purchase and ``no cash-out'' refinance 
Mortgage requirements (Mar. 31, 2022), https://guide.freddiemac.com/app/guide/section/4301.4. As of February 2023, guidelines from both 
Fannie Mae and Freddie Mac generally prohibit purchase of mortgages 
on properties with outstanding first-lien PACE obligations. 
Similarly, the Federal Housing Administration (FHA) updated its 
handbook requirements in 2017 to prohibit insurance of mortgage on 
properties with outstanding first-lien PACE obligations. See U.S. 
Dept. of Hous. & Urb. Dev., Property Assessed Clean Energy (PACE) 
(Dec. 7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf.
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    Mortgage industry stakeholders have also asserted in comments to 
the proposal and through other communications that PACE financing 
introduces risk to the mortgage market, as PACE liens take priority 
over pre-existing mortgage liens.\21\
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    \21\ See, e.g., Fed. Hous. Fin. Agency (FHFA), FHFA Statement on 
Certain Energy Retrofit Loan Programs (July 6, 2010), https://www.fhfa.gov/news/statement/fhfa-statement-on-certain-energy-retrofit-loan-programs; 85 FR 2736, FHFA Notice and Request for 
Input on PACE Financing (Jan. 16, 2020); Joint Letter from Mortgage 
Trade Assocs. to FHFA Director Mark Calabria (Mar. 16, 2020), 
https://www.housingpolicycouncil.org/_files/ugd/d315af_6cb569a5427f4e26ab4ef4d55038b3f6.pdf.
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    Since 2015, the CFPB has received over 125 complaints related to 
PACE financing, primarily from consumers in California and Florida. 
Many of the complaints allege fraud, deceptive practices, overly high 
costs, or trouble with refinancing the consumer's home. Twenty-eight of 
the complaints involve older adults, and five of the complaints involve 
consumers with limited English proficiency. Consumer advocates have 
suggested that consumers may not be aware of their ability to submit 
PACE complaints to the CFPB database or may have had difficulty 
categorizing them, which may have resulted in a lower number of 
complaints reported. Consumers in California are also able to submit 
complaints to their State PACE regulator and submitted 313 such 
complaints between 2020 and 2022 alone.\22\
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    \22\ Cal. Dep't of Fin. Prot. & Innovation, Annual Report of 
Operation of Finance Lenders, Brokers, and PACE Administrators 
Licensed Under the California Financing Law, at 41 (Aug. 2023) 
https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/2022-Annual-Report-CFL-Aggregated.pdf.
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    In August 2019, Renovate America, Inc. (Renovate), a major PACE 
company at the time, reached a $4 million settlement with six counties 
and one city in California.\23\ The complaint, filed in State court, 
alleged that Renovate misrepresented the PACE program or failed to make 
adequate disclosures

[[Page 2437]]

about key aspects of the program, including its government affiliation, 
tax deductibility, transferability of ethe obligations to subsequent 
property owners, financing costs, and Renovate's contractor 
verification policy.\24\ Subsequently, in June 2021, the California 
State PACE regulator moved to revoke Renovate's Administrator license, 
required to administer a PACE program in the State, after finding that 
one of its solicitors repeatedly defrauded homeowners in San Diego 
County.\25\ Renovate ultimately consented to the revocation.\26\
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    \23\ See Riverside Cnty. Dist. Att'y, District Attorneys 
Announce $4 Million Consumer Protection Settlement With ``PACE'' 
Program Administrator Renovate America, Inc. (Aug. 9, 2019), https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement; see also State of 
California v. Renovate America, Case No. RIC1904068 (Super. Ct. 
Riverside Cnty. 2019).
    \24\ Id.
    \25\ See Cal. Dep't of Fin. Prot. & Innovation, DFPI Moves to 
Revoke PACE Administrator's License After Finding Its Solicitor 
Defrauded Homeowners (June 4, 2021), https://dfpi.ca.gov/press_release/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/.
    \26\ Cal. Dep't of Fin. Prot. & Innovation, Settlement Agreement 
(Sept. 8, 2021), https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/09/Admin.-Action-Renovate-America-Inc.-Settlement-Agreement.pdf?emrc=090ca0.
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    In October 2022, Ygrene Energy Fund Inc. (Ygrene), a major PACE 
company, reached a $22 million settlement with the Federal Trade 
Commission (FTC) and the State of California over allegations regarding 
its conduct in the PACE marketplace.\27\ In a joint complaint, the FTC 
and California alleged that Ygrene deceived consumers about the 
potential financial impact of its financing and unfairly recorded liens 
on consumers' homes without their consent.\28\ The complaint further 
alleged that Ygrene and its contractors falsely told consumers that 
PACE financing would not interfere with the sale or refinancing of 
their homes and used high-pressure sales tactics and even forgery to 
enroll consumers into PACE programs.\29\
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    \27\ See Fed. Trade Comm'n, FTC, California Act to Stop Ygrene 
Energy Fund from Deceiving Consumers about PACE Financing, Placing 
Liens on Homes Without Consumers' Consent (Oct. 28, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/10/ftc-california-act-stop-ygrene-energy-fund-deceiving-consumers-about-pace-financing-placing-liens; see also Complaint for Permanent 
Injunction, Monetary Relief, Civil Penalties, and Other Relief, Fed. 
Trade Comm'n et al. v. Ygrene Energy Fund Inc., No. 2:22-cv-07864 
(C.D. Cal. 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Complaint%20-%20Dkt.%201%20-%2022-cv-07864.pdf.
    \28\ Id.
    \29\ Id.
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State Laws and Regulations in States With Active PACE Programs
California
    California authorized PACE programs in 2008 to finance projects 
related to renewable energy and energy efficiency, and later expanded 
the scope to include water efficiency, certain disaster hardening, and 
electric vehicle charging infrastructure measures.\30\ Since 2008, 
California has passed several laws to add and adjust consumer 
protections for PACE programs, with major additions in a series of 
amendments that took effect around 2018 (collectively, 2018 California 
PACE Reforms). Current California law requires that, before executing a 
PACE contract, PACE program administrators must make a determination 
that the consumer has a reasonable ability to pay the annual payment 
obligations based on the consumer's income, assets, and current debt 
obligations.\31\ California law also requires, among other protections, 
financial disclosures prior to consummation; \32\ a three-day right to 
cancel, which is extended to five days for older adults; \33\ mandatory 
confirmation-of-terms calls; \34\ and restrictions on contractor 
compensation.\35\ Additionally, California law imposes certain 
financial requirements for consumers to be eligible for PACE financing, 
including that consumers must be current on their property taxes and 
mortgage and generally not have been party to a bankruptcy proceeding 
within the previous four years.\36\ There is also a maximum permissible 
loan-to-value ratio for PACE financing under California law.\37\ 
California law exempts government agencies from some of these 
requirements.\38\
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    \30\ See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899, 
5899.3.
    \31\ Cal. Fin. Code secs. 22686 & 22687.
    \32\ Cal. Sts. & Hwys. Code sec. 5898.17.
    \33\ Cal. Sts. & Hwys. Code secs. 5898.16-.17.
    \34\ Cal. Sts. & Hwys. Code sec. 5913.
    \35\ Cal. Sts. & Hwys. Code sec. 5923.
    \36\ Cal. Fin. Code sec. 22684(a), (d)-(e).
    \37\ Cal. Fin. Code sec. 22684(h).
    \38\ Cal. Fin. Code sec. 22018(a) (exempting public agencies 
from the definition of ``program administrator'' that is subject to 
the ability-to-pay requirements set forth under Cal. Fin. Code sec. 
22687).
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    As part of the 2018 California PACE Reforms, California 
significantly increased the role of what is now called California's 
Department of Financial Protection and Innovation (DFPI).\39\ In 2019, 
the DFPI began licensing PACE program administrators and subsequently 
promulgated rules implementing some of California's statutory PACE 
provisions, which became effective in 2021.\40\ DFPI also has certain 
examination, investigation, and enforcement authorities over PACE 
program administrators, solicitors, and solicitor agents.\41\
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    \39\ Cal. AB 1284 (2017-2018), Cal. SB 1087 (2017-2018).
    \40\ 10 Cal. Code Regs. sec.1620.01 et seq. California law uses 
the term ``program administrator'' to refer to companies that are 
referred to here as PACE companies. See Cal. Fin. Code sec. 22018.
    \41\ Cal. Fin. Code sec. 22690. California law uses the term 
``PACE solicitor'' and ``PACE solicitor agent'' to refer to persons 
authorized by program administrators to solicit property owners to 
enter into PACE assessment contracts, often home improvement 
contractors. See Cal. Fin. Code sec. 22017(a)-(b).
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    PACE program administrators must be licensed by the DFPI under the 
California law. They must also establish and maintain processes for the 
enrollment of PACE solicitors and solicitor agents, including training 
and background checks.\42\ PACE program administrators are required to 
annually share certain operational data with DFPI.\43\ DFPI compiles 
the data in annual reports on PACE lending in California, which provide 
aggregated information on PACE loans, PACE program administrators and 
solicitors, and consumer complaints.\44\
---------------------------------------------------------------------------

    \42\ Cal. Fin. Code secs. 22680-82.
    \43\ Cal. Fin. Code sec. 22692.
    \44\ See, e.g., Cal. Dep't of Fin. Prot. & Innovation, Annual 
Report of Operation of Finance Lenders, Brokers, and PACE 
Administrators Licensed Under the California Financing Law (Aug. 
2022), https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf.
---------------------------------------------------------------------------

Florida
    Florida authorized PACE programs in 2010 to finance projects 
related to energy conservation and efficiency improvements, renewable 
energy improvements, and wind resistance improvements.\45\ The State 
imposed additional consumer protections for PACE transactions, which 
took effect July 2024 after the CFPB issued the proposed rule.\46\ 
Florida law imposes certain financial requirements to be eligible for 
PACE financing, including that consumers must be current on their 
property taxes and all mortgage debts on the property and have not been 
subject to bankruptcy proceedings within the preceding five years.\47\ 
It also includes a maximum loan-to-value ratio,\48\ requires 
disclosures about PACE loans and the terms of the PACE transaction,\49\ 
and requires that the estimated annual payment amount for all PACE 
loans on a property does not exceed 10 percent of the property owner's 
annual household income.\50\ Additionally, Florida law requires that 
the property owner provide holders or servicers of any existing 
mortgages secured by the property with notice of their intent to enter 
into a PACE financing agreement

[[Page 2438]]

together with the maximum principal amount to be financed and the 
maximum annual assessment necessary to repay that amount.\51\ Florida 
law also provides that a property owner may cancel a PACE transaction 
agreement within three business days of consummation without incurring 
any financial penalty for doing so \52\ and requires a written 
disclosure to prospective purchasers of a property subject to a PACE 
transaction.\53\ Additionally, Florida law directs counties and 
municipalities to maintain processes regulating home improvement 
contractors \54\ and third-party program administrators,\55\ regulates 
advertising practices surrounding PACE transactions,\56\ and sets forth 
circumstances in which PACE financing agreements may be 
unenforceable.\57\
---------------------------------------------------------------------------

    \45\ See Fla. HB 7179 (2010).
    \46\ See Fla. SB 770 (2024), codified at Fla. Stat. sec. 
163.081.
    \47\ Fla. Stat. sec. 163.081(3)(a).
    \48\ Id.
    \49\ Fla. Stat. sec. 163.081(4).
    \50\ Fla. Stat. sec. 163.081(3)(a)(12).
    \51\ Fla. Stat. sec. 163.081(5).
    \52\ Fla. Stat. sec. 163.081(6).
    \53\ Fla. Stat. sec. 163.081(8).
    \54\ Fla. Stat. sec. 163.083.
    \55\ Fla. Stat. sec. 163.084.
    \56\ Fla. Stat. sec. 163.085.
    \57\ Fla. Stat. sec. 163.086.
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Missouri
    Missouri authorized PACE programs in 2010 to finance projects 
involving energy efficiency improvements and renewable energy 
improvements.\58\ In 2021, Missouri enacted new legislation imposing 
certain consumer protection requirements for PACE transactions. The law 
currently requires clean energy development boards (the government 
entities offering PACE programs) to provide a disclosure form to 
homeowners that shows the financing terms, including the total amount 
funded and borrowed, the fixed rate of interest charged, the APR, and a 
statement that, if the property owner sells or refinances the property, 
the owner may be required by a mortgage lender or a purchaser to pay 
off the obligation.\59\ It also requires verbal confirmation of certain 
provisions of the contract, imposes specific financial requirements to 
execute a PACE contract, and provides for a three-day right to 
cancel.\60\ The 2021 legislation also limited the term, amount of 
financing, and total indebtedness secured by the property and required 
the clean energy development board to review and approve PACE 
contracts.\61\ The new requirements became effective January 1, 
2022.\62\
---------------------------------------------------------------------------

    \58\ Mo. HB 1692 (2010), codified at Mo. Rev. Stat. sec. 
67.2800(2)(8) (defining projects eligible for financing).
    \59\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2818(4).
    \60\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2817(2) 
(financial requirements to execute an assessment contract); 
67.2817(4) (right to cancel); 67.2818(6) (verbal confirmation).
    \61\ Mo. HB 697, codified at Mo. Rev. Stat. secs. 67.2817(2), 
67.2818(2)-(3).
    \62\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2840.
---------------------------------------------------------------------------

Self-Regulatory Efforts
    In addition to consumer protections mandated by State governments, 
in November 2021, the national trade association that advocates for the 
PACE financing industry announced voluntary consumer protection policy 
principles for PACE programs nationwide.\63\ According to the trade 
association, the 22 principles are designed to establish a national 
framework for enhanced accountability and transparency within PACE 
programs and to offer greater protections for all consumers, as well as 
additional protections for low-income homeowners, based on stated 
income, and those over the age of 75.\64\ They include provisions 
relating to ability-to-pay, financing disclosures, a right to cancel, 
and foreclosure-avoidance protections, among others.
---------------------------------------------------------------------------

    \63\ See PACENation, PACENation Unveils 22 New Consumer 
Protection Policies for Residential PACE Programs Nationwide (Nov. 
5, 2021), https://www.pacenation.org/pacenation-unveils-22-consumer-protection-policies-for-residential-pace-programs-nationwide/.
    \64\ Id.
---------------------------------------------------------------------------

    In comments to the proposal, PACE industry stakeholders enumerated 
consumer protections that they said the industry has adopted. These 
commenters noted the use of certain disclosures by PACE originators, as 
well as other activities intended to enhance consumers' understanding 
of PACE transactions, such as confirmation-of-terms calls. PACE 
industry commenters also described industry underwriting standards, 
including loan-to-value limitations, and mandatory confirmation that 
the property owner is not in bankruptcy proceedings or delinquent on 
property taxes or mortgage payments. Industry commenters further 
described industry efforts to oversee contractors, including efforts to 
verify contractors' licensing and insurance status, conduct background 
checks for contractors, require contractors to certify compliance with 
program policies and marketing standards, provide training to 
contractors, monitor contractor performance, terminate contractors who 
violate program policies, and withhold funds from the contractor for 
the project until the project is certified as complete by the homeowner 
and contractor. These commenters stated that industry actors closely 
monitor delinquency trends and provide consumers with a right to cancel 
and other protections following consummation.

B. Summary of the Rulemaking Process

Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
    The Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA) was signed into law on May 24, 2018.\65\ EGRRCPA section 307 
amended TILA to mandate that the CFPB take regulatory action on PACE 
financing, which it defines as ``financing to cover the costs of home 
improvements that results in a tax assessment on the real property of 
the consumer.'' It requires the CFPB to prescribe regulations that (1) 
carry out the purposes of TILA section 129C(a), and (2) apply TILA 
section 130 with respect to violations under TILA section 129C(a) with 
respect to PACE financing. It also requires that the regulations 
account for the unique nature of PACE financing.\66\ TILA section 
129C(a) contains TILA's ability-to-repay provisions for residential 
mortgage loans, and TILA section 130 contains civil liability 
provisions. Thus, section 307 requires the CFPB to apply TILA's 
ability-to-repay provisions to PACE financing, and to apply TILA's 
civil liability provisions for violations of those ability-to-repay 
provisions, all in a way that accounts for the unique nature of PACE 
financing. This final rule discusses the implementation of the ability-
to-repay and civil liability requirements further in the section-by-
section analysis of Sec.  1026.43.
---------------------------------------------------------------------------

    \65\ Public Law 115-174, 132 Stat. 1296 (2018).
    \66\ EGRRCPA section 307, amending TILA section 
129C(b)(3)(C)(ii), 15 U.S.C. 1639c(b)(3)(C)(ii). EGRRCPA section 307 
also includes amendments authorizing the CFPB to ``collect such 
information and data that the CFPB determines is necessary'' in 
prescribing the regulations and requiring the CFPB to ``consult with 
State and local governments and bond-issuing authorities.''
---------------------------------------------------------------------------

Outreach
    To learn about PACE transactions and the industry, the CFPB has 
engaged with a wide variety of stakeholders since 2015, including 
consumer advocates, a range of public and private participants in the 
PACE financing industry, mortgage industry stakeholders, and 
representatives from energy and environmental groups. The engagement 
has included listening sessions, roundtable discussions, question-and-
answer sessions, consultation calls soliciting stakeholder input, 
briefings of external stakeholders, panel appearances by CFPB staff, 
and written correspondence.
    The CFPB's outreach relating to PACE financing is summarized at a 
high level

[[Page 2439]]

below.\67\ The outreach has supplemented information on PACE financing 
that the CFPB has gleaned from independent research; the comments 
responding to the Advance Notice of Proposed Rulemaking and the 
proposed rule, discussed below; the data collection described below in 
this in part; and information from publicly available sources such as 
news reports, research and analysis, and litigation documents. The CFPB 
also consulted with the Board and several other Federal agencies, as 
addressed in part VI.A.
---------------------------------------------------------------------------

    \67\ The CFPB also engaged in extensive outreach with numerous 
stakeholders to design and complete the CFPB data collection on PACE 
financing that is discussed below.
---------------------------------------------------------------------------

1. Consumer Advocates
    The CFPB began corresponding with consumer advocates regarding PACE 
financing in 2016. These stakeholders have shared their concerns about 
consumer risks in the PACE financing market and stories of PACE 
financing resulting in financial harm to consumers.
    The CFPB continued the engagement after EGRRCPA section 307 passed, 
meeting on numerous occasions with individual consumer advocates and 
consumer advocacy groups to discuss a range of topics related to PACE 
financing. For example, these stakeholders have shared their 
understanding of how the PACE financing industry functions, including 
the structure of the financial obligation, the different roles of 
government units and private parties, industry trends, and the effects 
of State legislation on PACE financing. They have also voiced consumer 
protection concerns and shared legal and policy analysis regarding the 
implementation of EGRRCPA section 307 and the application of TILA to 
PACE transactions.
2. Private PACE Industry Stakeholders
    Since 2015, the CFPB has engaged on many occasions with various 
private PACE industry stakeholders, including private PACE companies, a 
national trade association, private companies that help administer the 
assessments (assessment administrators), and at least one bond counsel. 
These stakeholders have provided the CFPB a great deal of information 
about PACE transactions, industry business practices, market trends, 
and the roles of different industry participants.
    Additionally, the PACE companies, assessment administrators, and 
the national trade association have shared industry trends and their 
views on how the industry has been developing in different 
jurisdictions. They have also shared their views on some of the 
challenges and progress the industry has experienced as the programs 
have evolved, including, for example, the causes of fluctuations in 
loan volumes, industry efforts to improve the consumer experience, 
benefits of PACE financing, and the effects of consumer protection 
requirements in particular States. Some of these stakeholders have also 
shared their perspectives on EGRRCPA section 307 and this rulemaking.
3. State and Local Governments and Bond-Issuing Authorities
    The CFPB has conferred on numerous occasions with State and local 
governments and bond-issuing authorities involved in PACE financing to 
gather information about PACE financing and this rulemaking, beginning 
before EGRRCPA section 307 and accelerating after it took effect given 
its mandate for the CFPB to ``consult with State and local governments 
and bond-issuing authorities.'' \68\ The CFPB has consulted with 
government sponsors of PACE financing programs, agencies involved in 
different aspects of the programs, local property tax collectors, 
public PACE financing providers, and county and city officials. The 
CFPB has engaged with bond-issuing authorities on a number of 
occasions, including discussions over the phone and in person, and 
through written correspondence. The CFPB has also conferred on a number 
of occasions with membership organizations representing municipalities.
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
---------------------------------------------------------------------------

    In the course of developing the final rule, CFPB staff also 
conducted a series of consultation calls to promote awareness about the 
CFPB rulemaking and gather input on topics that the CFPB was 
considering addressing in this rulemaking, including, for example, 
whether the CFPB should use the same ability-to-repay framework for 
PACE financing that currently applies to mortgage credit or a different 
framework, what changes should be made to account for the unique nature 
of PACE financing, whether to apply any existing qualified mortgage 
definitions to PACE financing, how to apply TILA's general civil 
liability provisions to violations of the ability-to-repay requirements 
for PACE financing, and the implications of this rulemaking for PACE 
financing bonds. Before the CFPB issued the proposal, it held a series 
of calls with several stakeholder groups, including: (1) State agencies 
in the three States that currently offer PACE, (2) California local 
government officials, (3) Missouri local government officials, (4) 
Florida local government officials, and (5) State and local officials 
from states that do not currently offer PACE. CFPB staff held 
additional consultation calls with State and local governments and 
bond-issuing authorities after the NPRM's comment period closed, to 
solicit additional information and perspectives about this rulemaking 
and recent market developments.
    During these outreach and consultation efforts, public entities 
involved in the operation of PACE financing and third parties operating 
on their behalf expressed divergent views on PACE financing. For 
example, some individuals from local tax collectors' offices and other 
government units expressed concern about the risks or challenges that 
PACE financing can create for consumers or local taxing authorities. In 
part because of these concerns, some government representatives shared 
consumer protection recommendations and background information about 
how the PACE financing industry operates in particular jurisdictions. 
Several localities with active PACE financing programs expressed 
consumer protection concerns and informed the CFPB that they would 
welcome application of TILA's ability-to-repay provisions to PACE, or 
that they have implemented certain consumer protection standards 
themselves. A nonprofit organization that administered a PACE financing 
program on behalf of a local government informed the CFPB that the 
locality ended its PACE financing program, largely due to consumer 
protection concerns. One stakeholder from a tax collector's office 
asserted that, while there are limits to PACE loan amounts relative to 
the market value of the home, standards for obtaining a home's market 
value are insufficient. This stakeholder asserted that, as a result, 
PACE consumers could owe more than the market value of the property. 
This stakeholder also asserted that interest rates and APRs for PACE 
transactions are relatively high and do not reflect the fact that they 
are secure for investors and carry relatively low administrative costs, 
given that PACE transactions are repaid through the property tax 
system.
    Other local governments (and third parties they work with) shared 
views that reflect more positive assessments of the industry. For 
example, representatives from one government sponsor of PACE financing 
(that later ceased sponsoring new PACE financing

[[Page 2440]]

originations \69\) told the CFPB that the program carries important 
consumer benefits, including that it provides a financing option for 
home improvement projects that have energy and environmental benefits, 
and creates jobs. Local government representatives in certain 
jurisdictions expressed enthusiasm about aspects of PACE financing such 
as increased solar panel installations and indicated that they think 
PACE financing programs generally function well. Some government 
sponsors indicated that their PACE financing programs had instituted a 
number of practices that were consumer-protective, such as repayment 
analysis, low fees, contractor screening, or monitoring and oversight 
of private entities involved in the originations. Some government 
sponsors expressed concern that Federal regulation could negatively 
impact PACE programs, and that the CFPB should not apply TILA's 
ability-to-repay provisions or other consumer protections to PACE 
financing. Several State and local entities also informed the CFPB that 
consumer complaints had declined significantly in recent years.
---------------------------------------------------------------------------

    \69\ The CFPB understands that a number of government sponsors, 
some of which participated in the CFPB's outreach, have stopped 
participating in new originations. See, e.g., Jeff Horseman, 
Riverside-based agency to end controversial PACE loans for energy 
improvements, The Press-Enterprise (Dec. 12, 2022); Andrew Khouri, 
L.A. County ends controversial PACE home improvement loan program, 
L.A. Times (May 21, 2020), https://www.latimes.com/homeless-housing/story/2020-05-21/la-fi-pace-home-improvement-loans-la-county.
---------------------------------------------------------------------------

    A public PACE provider asserted that PACE is an important public 
policy tool that provides financing to retrofit properties that are at 
risk of natural disaster, in particular wildfires. This stakeholder 
asserted that PACE financing helps homeowners maintain homeowners' 
insurance, and that its PACE program does not pose significant consumer 
risk. It requested that public PACE providers be exempt from the final 
rule.
4. Other Stakeholders
    The CFPB's outreach has also included other stakeholders with an 
interest in PACE financing. For example, several times since 2016, the 
CFPB has discussed PACE financing with national and State-level 
mortgage industry trade organizations. These stakeholders have provided 
updates on, for example, State-level developments in the PACE financing 
industry and analysis of Federal policy involving PACE financing. Some 
have also shared concerns, in comments to the proposal and through 
other channels, about the potential impact of PACE financing on 
mortgage industry participants, noting, for example, the priority 
position of liens securing PACE transactions relative to non-PACE 
mortgage liens, the challenges that non-PACE mortgage industry 
stakeholders have in obtaining information about PACE transactions and 
attendant risks, and that non-PACE mortgage servicers may need to 
collect PACE transactions through an escrow account, which may include 
advancing their own funds if the consumer is unable to afford the PACE 
financing payment. Some mortgage industry stakeholders have also raised 
consumer protection concerns, sharing anecdotal reports of consumer 
harm and asserting that, in practice, consumers have often had to repay 
the full PACE financing balance before they have been able to sell 
properties encumbered with a PACE financing lien. Some suggested that 
the CFPB should treat PACE like a non-PACE mortgage or apply TILA more 
generally to PACE.
Advance Notice of Proposed Rulemaking in 2019
    On March 4, 2019, the CFPB issued an Advance Notice of Proposed 
Rulemaking to solicit information relating to residential PACE 
financing.\70\ The purpose of the Advance Notice of Proposed Rulemaking 
was to gather information to better understand the PACE financing 
market and other information to inform a proposed rulemaking under 
EGRRCPA section 307.
---------------------------------------------------------------------------

    \70\ Advance Notice of Proposed Rulemaking on Residential 
Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019).
---------------------------------------------------------------------------

    In response to the Advance Notice of Proposed Rulemaking, the CFPB 
received over 115 comments, which were submitted by a variety of 
entities, including individual consumers, consumer groups, private PACE 
industry participants, mortgage stakeholders, energy and environmental 
groups, and government entities, among others. A summary of some of the 
legal and policy positions reflected in the Advance Notice of Proposed 
Rulemaking comments is included in the proposal.\71\
---------------------------------------------------------------------------

    \71\ 88 FR 30388, 30392.
---------------------------------------------------------------------------

Data Collection and PACE Report
    EGRRCPA section 307 authorizes the CFPB to ``collect such 
information and data that the CFPB determines is necessary'' to support 
the PACE rulemaking required by the section.\72\ In October 2020, the 
CFPB requested PACE financing data from all companies providing PACE 
financing at that time. The request was voluntary and was intended to 
gather information on PACE transaction applications and originations 
between July 1, 2014, and December 31, 2019, including basic 
underwriting information used for applications, application outcomes, 
and loan terms. The CFPB also contracted with one of the three 
nationwide consumer reporting agencies to obtain credit record data for 
the PACE consumers in the PACE transaction data.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 1639c(b)(3)(C)(iii)(I).
---------------------------------------------------------------------------

    In August 2022, the CFPB received from its contractor de-identified 
PACE data from the four PACE companies that were active in the PACE 
market at the time of submission and matching de-identified credit 
record data for the consumers involved in the PACE transactions.\73\ 
The PACE company data encompassed about 370,000 PACE transaction 
applications submitted in California and Florida from 2014 to 2019 and 
about 128,000 resulting PACE transaction originations. The CFPB's 
contractor was able to provide matching credit data for about 208,000 
individual PACE consumers, which included periodic credit snapshots for 
each consumer between June 2014 and June 2022. In total, the matched 
consumers submitted about 286,000 PACE applications and entered into 
approximately 100,000 PACE transactions.\74\
---------------------------------------------------------------------------

    \73\ The CFPB received data from FortiFi Financial, Home Run 
Financing, Renew Financial, and Ygrene Energy Fund.
    \74\ Matched consumers resided in census tracts with smaller 
Hispanic populations, higher median income, and lower average 
education compared to consumers who were not matched. The PACE 
Report verifies that weighting the sample to be more like the full 
population of PACE consumers has no meaningful effect on the main 
results of the Report. PACE Report, supra note 12, at 11.
---------------------------------------------------------------------------

    The CFPB used the acquired data to develop a report that analyzes 
the impact of PACE transactions on consumer outcomes, with a particular 
focus on mortgage delinquency. In addition to other analyses, the 
Report examines consumers who obtained originated PACE transactions and 
compares them to those who applied for PACE transactions and were 
approved but did not proceed. The report, entitled ``PACE Financing and 
Consumer Financial Outcomes'' was published concurrently with the 
NPRM.\75\
---------------------------------------------------------------------------

    \75\ See PACE Report, supra note 12.
---------------------------------------------------------------------------

    Among other findings, the PACE transactions analyzed in the PACE 
Report led to an increase in negative credit outcomes, particularly 60-
day mortgage delinquency, with an increase of 2.5 percentage points 
over a two-year span following PACE transaction origination. 
Additionally, the PACE

[[Page 2441]]

borrowers discussed in the PACE Report resided in census tracts with 
higher percentages of Black and Hispanic residents than the average for 
their States.\76\ However, the effect of PACE transactions on non-PACE 
mortgage delinquency was statistically similar for PACE borrowers in 
majority-white census tracts compared to those in census tracts that 
were not majority white.\77\ The PACE Report also assesses the impact 
of the 2018 California PACE Reforms, discussed in part II.A. The 
analysis finds that these laws improved consumer outcomes while 
substantially reducing the volume of PACE lending.\78\
---------------------------------------------------------------------------

    \76\ Id. at 4.
    \77\ Id. at 38-39, Figure 11.
    \78\ Id. at 4-5.
---------------------------------------------------------------------------

    The CFPB discusses comments that addressed the PACE Report in part 
VI.
Notice of Proposed Rulemaking
    The CFPB issued a proposed rule on PACE financing on May 1, 2023, 
concurrent with the PACE Report described in this part above. The NPRM 
was published in the Federal Register on May 11, 2023,\79\ and the 
public comment period closed on July 26, 2023.\80\ The CFPB proposed 
the following under Regulation Z:
---------------------------------------------------------------------------

    \79\ 88 FR 30388.
    \80\ The CFPB received several written requests to extend the 
comment period. The CFPB believes that interested parties had 
sufficient time to consider the CFPB's proposal and prepare their 
responses and did not extend the comment period beyond July 26, 
2023. Seventy-six days elapsed between the date the NPRM was 
published in the Federal Register and the comment deadline, and ten 
additional days elapsed between the CFPB's issuance of the NPRM and 
its publication in the Federal Register. Additionally, the CFPB has 
received a number of ex parte comments after the close of the 
comment period. It has added these comments to the rulemaking docket 
and considered them in developing this final rule.
---------------------------------------------------------------------------

     To clarify an existing exclusion to Regulation Z's 
definition of credit that relates to tax liens and tax assessments. 
Specifically, the CFPB proposed to clarify that the commentary's 
exclusion of tax liens and tax assessments from being ``credit,'' as 
defined in Sec.  1026.2(a)(14), applies only to involuntary tax liens 
and involuntary tax assessments.
     To make a number of adjustments to the requirements for 
Loan Estimates and Closing Disclosures under Sec. Sec.  1026.37 and 
1026.38 that would apply when those disclosures are provided for PACE 
transactions.
     To provide new model forms under H-24(H) and H-25(K) of 
appendix H for the Loan Estimate and Closing Disclosure, respectively, 
specifically designed for PACE transactions.
     To exempt PACE transactions from the requirement to 
establish escrow accounts for certain higher-priced mortgage loans, 
under proposed Sec.  1026.35(b)(2)(i)(E).
     To exempt PACE transactions from the requirement to 
provide periodic statements, under proposed Sec.  1026.41(e)(7).
     To apply the ability-to-repay requirements in Sec.  
1026.43 to PACE transactions with a number of specific adjustments to 
account for the unique nature of PACE financing, including requiring 
PACE creditors to consider certain monthly payments that they know or 
have reason to know the consumer will have to pay into the consumer's 
escrow account as an additional factor when making a repayment ability 
determination for PACE transactions extended to consumers who pay their 
property taxes through an escrow account.
     To provide that a PACE transaction is not a qualified 
mortgage as defined in Sec.  1026.43.
     To extend the ability-to-repay requirements and the 
liability provisions of TILA section 130 to any ``PACE company,'' as 
defined in proposed Sec.  1026.43(b)(14), that is substantially 
involved in making the credit decision for a PACE transaction.
     To provide clarification regarding how PACE and non-PACE 
mortgage creditors should consider pre-existing PACE transactions when 
originating new mortgage loans.
    The CFPB received over 130 comments on the proposal. A variety of 
stakeholders submitted comment, including consumers and consumer 
groups, PACE companies, a public PACE provider, government sponsors of 
PACE programs, local government entities or their membership 
organizations, State agencies, a PACE industry trade association, an 
assessment administrator, home improvement contractor stakeholders, 
bond counsel, credit union stakeholders, mortgage industry 
stakeholders, environmental and energy stakeholders, chambers of 
commerce, Members of the U.S. Congress, the U.S. Small Business 
Administration Office of Advocacy, and State attorneys general. The 
CFPB has considered the comments and is adopting the proposal with 
certain adjustments as described in the sections below.

III. Legal Authority

    The CFPB is finalizing amendments to Regulation Z pursuant to its 
authority under the Consumer Financial Protection Act of 2010 (CFPA) 
and other provisions of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act),\81\ EGRRCPA section 307, TILA, and the 
Real Estate Settlement Procedures Act of 1974 (RESPA).\82\
---------------------------------------------------------------------------

    \81\ Public Law 111-203,124 Stat. 1376 (2010).
    \82\ 12 U.S.C. 2601 et seq.
---------------------------------------------------------------------------

A. Dodd-Frank Act

    Section 1022(b)(1) of the CFPA authorizes the CFPB to prescribe 
rules ``as may be necessary or appropriate to enable the CFPB to 
administer and carry out the purposes and objectives of the Federal 
consumer financial laws, and to prevent evasions thereof.'' \83\ Among 
other statutes, TILA, RESPA, and the CFPA are Federal consumer 
financial laws.\84\ Accordingly, the CFPB is exercising its authority 
under CFPA section 1022(b) to prescribe rules that carry out the 
purposes and objectives of TILA, RESPA, and the CFPA and prevent 
evasion of those laws.
---------------------------------------------------------------------------

    \83\ 12 U.S.C. 5512(b)(1).
    \84\ CFPA section 1002(14), 12 U.S.C. 5481(14) (defining 
``Federal consumer financial law'' to include the ``enumerated 
consumer laws'' and the provisions of CFPA); CFPA section 1002(12), 
12 U.S.C. 5481(12) (defining ``enumerated consumer laws'' to include 
TILA and RESPA).
---------------------------------------------------------------------------

    Section 1405(b) of the Dodd-Frank Act provides that, 
notwithstanding any other provision of title XIV of the Dodd-Frank Act, 
in order to improve consumer awareness and understanding of 
transactions involving residential mortgage loans through the use of 
disclosures, the CFPB may exempt from or modify disclosure 
requirements, in whole or in part, for any class of residential 
mortgage loans if the CFPB determines that such exemption or 
modification is in the interest of consumers and in the public 
interest.\85\ Section 1401 of the Dodd-Frank Act, which amends TILA 
section 103(cc)(5), generally defines a residential mortgage loan as 
any consumer credit transaction that is secured by a mortgage on a 
dwelling or on residential real property that includes a dwelling, 
other than an open-end credit plan or an extension of credit secured by 
a consumer's interest in a timeshare plan.\86\ Notably, the authority 
granted by section 1405(b) applies to disclosure requirements generally 
and is not limited to a specific statute or statutes. Accordingly, 
Dodd-Frank Act section 1405(b) is a broad source of authority to exempt 
from or modify the disclosure requirements of TILA and RESPA. In 
developing this final rule, the CFPB has considered the purposes of 
improving consumer awareness and understanding of transactions 
involving residential

[[Page 2442]]

mortgage loans through the use of disclosures and the interests of 
consumers and the public. The CFPB is finalizing these amendments 
pursuant to its authority under Dodd-Frank Act section 1405(b). For the 
reasons discussed below and in the 2013 TILA-RESPA Rule, the CFPB 
believes the final rule is in the interest of consumers and in the 
public interest, consistent with Dodd-Frank Act section 1405(b).
---------------------------------------------------------------------------

    \85\ Public Law 111-203, 124 Stat. 1376, 2142 (2010) (codified 
at 15 U.S.C. 1601 note).
    \86\ Public Law 111-203, 124 Stat. 1376, 2138 (2010) (codified 
at 15 U.S.C. 1602(cc)(5)).
---------------------------------------------------------------------------

B. TILA

    TILA section 105(a) directs the CFPB to prescribe regulations to 
carry out the purposes of TILA and provides that such regulations may 
contain additional requirements, classifications, differentiations, or 
other provisions and may further provide for such adjustments and 
exceptions for all or any class of transactions that the CFPB judges 
are necessary or proper to effectuate the purposes of TILA, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith.\87\ A purpose of TILA is to assure a meaningful disclosure 
of credit terms so that the consumer will be able to compare more 
readily the various available credit terms and avoid the uninformed use 
of credit.\88\ Additionally, a purpose of TILA sections 129B and 129C 
is to assure that consumers are offered and receive residential 
mortgage loans on terms that reasonably reflect their ability to repay 
the loans and that are understandable and not unfair, deceptive, or 
abusive.\89\
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    \87\ 15 U.S.C. 1604(a).
    \88\ 15 U.S.C. 1601(a).
    \89\ 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------

    TILA section 105(b), amended by the CFPA, requires publication of 
an integrated disclosure for mortgage loan transactions covering the 
disclosures required by TILA and the disclosures required by sections 4 
and 5 of RESPA.\90\ The purpose of the integrated disclosure is to 
facilitate compliance with the disclosure requirements of TILA and 
RESPA and to improve borrower understanding of the transaction. The 
CFPB provided additional discussion of this integrated disclosure 
mandate in the 2013 TILA-RESPA Rule.\91\
---------------------------------------------------------------------------

    \90\ Public Law 111-203, 124 Stat. 1376, 2108 (2010) (codified 
at 15 U.S.C. 1604(b)).
    \91\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
---------------------------------------------------------------------------

    Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the CFPB to 
exempt from all or part of TILA any class of transactions if the CFPB 
determines after the consideration of certain factors that TILA 
coverage does not provide a meaningful benefit to consumers in the form 
of useful information or protection.
    TILA section 129C(b)(3)(A) directs the CFPB to prescribe 
regulations to carry out the purposes of the subsection.\92\ In 
addition, TILA section 129C(b)(3)(B)(i) authorizes the CFPB to 
prescribe regulations that revise, add to, or subtract from the 
criteria that define a qualified mortgage upon a finding that such 
regulations are necessary or proper to ensure that responsible, 
affordable mortgage credit remains available to consumers in a manner 
consistent with the purposes of TILA section 129C; or are necessary and 
appropriate to effectuate the purposes of TILA sections 129B and 129C, 
to prevent circumvention or evasion thereof, or to facilitate 
compliance with such sections.\93\
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 1639c(b)(3)(A).
    \93\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------

    In section 307 of the EGRRCPA, codified in TILA section 
129C(b)(3)(C), Congress directed the CFPB to conduct a rulemaking to 
``prescribe regulations that carry out the purposes of [TILA's ATR 
requirements] and apply section 130 [of TILA] with respect to 
violations [of the ATR requirements] with respect to [PACE] financing, 
which shall account for the unique nature of [PACE] financing.'' \94\
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 1639c(b)(3)(C)(ii).
---------------------------------------------------------------------------

C. RESPA

    RESPA section 4(a), amended by the CFPA, requires publication of an 
integrated disclosure for mortgage loan transactions covering the 
disclosures required by TILA and the disclosures required by sections 4 
and 5 of RESPA.\95\
---------------------------------------------------------------------------

    \95\ Public Law 111-203, 124 Stat. 1376, 2103 (2010) (codified 
at 12 U.S.C. 2603(a)). See discussion of integrated disclosure 
above.
---------------------------------------------------------------------------

    Section 19(a) of RESPA authorizes the CFPB to prescribe such rules 
and regulations and to make such interpretations and grant such 
reasonable exemptions for classes of transactions as may be necessary 
to achieve the purposes of RESPA.\96\ One purpose of RESPA is to effect 
certain changes in the settlement process for residential real estate 
that will result in more effective advance disclosure to home buyers 
and sellers of settlement costs.\97\ In addition, in enacting RESPA, 
Congress found that consumers are entitled to greater and more timely 
information on the nature and costs of the settlement process and to be 
protected from unnecessarily high settlement charges caused by certain 
abusive practices in some areas of the country.\98\ In developing rules 
under RESPA section 19(a), the CFPB has considered the purposes of 
RESPA, including to effect certain changes in the settlement process 
that will result in more effective advance disclosure of settlement 
costs.
---------------------------------------------------------------------------

    \96\ 12 U.S.C. 2617(a).
    \97\ 12 U.S.C. 2601(b).
    \98\ 12 U.S.C. 2601(a). In the past, RESPA section 19(a) has 
served as a broad source of authority to prescribe disclosures and 
substantive requirements to carry out the purposes of RESPA.
---------------------------------------------------------------------------

IV. Discussion of the Final Rule

A. General Comments on the NPRM

    The CFPB received comments addressing several topics other than 
those discussed in the section-specific analyses below. These topics 
are largely outside the scope of this rulemaking.
Super-Priority Lien Status
    Many mortgage industry stakeholders and consumer groups expressed 
concerns about the super-priority status held by liens securing PACE 
transactions. Several commenters stated that the super-priority status 
of PACE liens increases risks for borrowers, mortgage lenders, 
communities, and secondary mortgage market participants. A mortgage 
industry trade association asserted that PACE transactions violate the 
first-lien status of mortgages and create risk for consumers and 
communities. One mortgage industry trade association stated that the 
super-priority lien status undermines mortgage lenders' underwriting by 
increasing the loss severity during foreclosure for the mortgage lender 
in a way that was not priced in, limits saleability of mortgages, and 
requires mortgage servicers to advance funds to secure the security 
interest when consumers go delinquent on property taxes and PACE 
obligations. A credit union stated that the super-lien priority 
decreases home marketability, and an escrow association stated that 
consumers have not understood the priority status of PACE liens.
    Some commenters, including a credit union and other mortgage 
industry stakeholders, described challenges with identifying the 
presence of existing PACE liens. Some commenters, including a community 
bankers association, a credit union trade association, and a group of 
mortgage industry and consumer group stakeholders, asked the CFPB to 
work with State and local governments to find solutions to better 
identifying PACE liens or downgrading their priority status.
    In contrast to these comments, a PACE company asserted that a PACE 
transaction's super-priority lien status

[[Page 2443]]

makes PACE transactions more secure, which allows capital markets to 
embrace lower interest rates, with the savings passed on to consumers. 
Another PACE company stated that, in California, there is a loss 
reserve in place and only two claims have ever been made, showing the 
concerns related to whether the lien status would impair the security 
of first mortgage loans have not materialized.
Requests for Additional Regulatory Requirements
    Several commenters suggested additional regulation of PACE 
financing that was not contemplated in the proposed rule. For instance, 
a State housing agency association suggested requiring PACE companies 
to report PACE transactions to credit bureaus, prohibiting prepayment 
penalties on PACE transactions if the first mortgage does not impose 
prepayment penalties, regulating the types of fees allowed on PACE 
transactions, and imposing conflict-of-interest provisions on PACE 
transactions like those found under RESPA. A PACE company recommended 
prohibiting payments to home improvement contractors for marketing 
services and for work done prior to project completion. This commenter 
also suggested the CFPB craft protections against antitrust or 
defamation claims for PACE companies, similar to those available to 
financial institutions who file Suspicious Activity Reports, so that 
they can more effectively share information about problematic home 
improvement contractors.
    A consumer group suggested the CFPB require independent 
verification before PACE-financed work begins (specifically, an energy 
audit to verify the need for cost-effective improvements and verifying 
the consumer understands related costs and risks) and after work is 
completed but before the contractor is paid. Another consumer group 
urged the CFPB to prohibit false assertions made on social media 
websites.
    A consortium of consumer groups stated that the CFPB should 
finalize the proposal quickly and should monitor and incorporate 
consumer protections into other emerging lending products intended to 
be environmentally friendly (i.e., ``green'' lending products, such as 
those being implemented under Inflation Reduction Act programs), to 
minimize what they characterized as public harm and negative 
consequences that resulted from the problematic design and predatory 
practices of PACE financing. A few other consumer and environmental 
groups echoed the need for collaboration among Federal agencies on 
green lending products to share lessons learned from PACE financing and 
to ensure these products are fair, safe, affordable, and sustainable 
for consumers.
National Environmental Policy Act
    Two PACE companies and a PACE industry trade association stated 
that the National Environmental Policy Act (NEPA) applies to the CFPB's 
PACE financing rulemaking. These commenters asserted that the CFPB 
should complete an environmental impact statement under NEPA. 
Specifically, commenters expressed concerns that the proposed rule 
would have a significant adverse impact on the quality of the human 
environment by causing fewer PACE loans to be originated, thereby 
reducing the environmental benefits associated with PACE financing, 
including benefits related to the reduction of water and energy 
consumption.
    The CFPB has prepared an environmental assessment and finding of no 
significant impact regarding the proposed rule, to be published in the 
Federal Register concurrently with this final rule. The environmental 
assessment provides the basis for the conclusion that the proposed 
rule, which the CFPB is adopting in this final rule with small changes 
described below, will not have a significant effect on the human 
environment.\99\ In developing the environmental assessment, the CFPB 
considered commenters' estimates of the environmental benefits 
associated with PACE financing. As discussed in the environmental 
assessment, the CFPB found that those estimates likely overstate the 
impacts on energy and water consumption that PACE loans provide. It 
also found, however, that even assuming that the proposal would 
entirely eliminate PACE financing (an outcome the CFPB does not expect 
to occur), the proposed rule would not result in significant effects on 
the human environment. Based on the finding of no significant impact, 
the CFPB determined that an environmental impact statement need not be 
prepared as some commenters suggested.
---------------------------------------------------------------------------

    \99\ CFPB, Environmental Assessment and Finding of No 
Significant Impact (Dec. 17, 2024).
---------------------------------------------------------------------------

B. Section-by-Section Analysis

1026.2 Definitions and Rules of Construction
1026.2(a) Definitions
1026.2(a)(14) Credit
    Section 1026.2(a)(14) defines ``credit'' to mean ``the right to 
defer payment of debt or to incur debt and defer its payment.'' The 
CFPB proposed to clarify that comment 2(a)(14)-1.ii's exclusion of tax 
liens and tax assessments from the definition of credit applies only to 
involuntary tax liens and involuntary tax assessments, and not to 
voluntary ones, such as PACE transactions. The CFPB proposed to change 
the comment by adding the word ``involuntary'' to clarify which tax 
liens and tax assessments are not considered credit. Without an 
exclusion for voluntary tax liens and voluntary tax assessments, the 
proposal separately recognized that PACE transactions would meet TILA's 
definition of ``credit.'' For the reasons discussed below, the CFPB is 
finalizing comment 2(a)(14)-1.ii as proposed, to clarify that 
involuntary tax liens, involuntary tax assessments, court judgments, 
and court approvals of reaffirmation of debts in bankruptcy are not 
considered credit for purposes of the regulation.\100\
---------------------------------------------------------------------------

    \100\ The CFPB is also finalizing a conforming change later in 
the comment, inserting the word ``involuntary'' before ``tax lien'' 
in an illustrative example of third-party financing that is credit 
for purposes of the regulation notwithstanding the exclusion.
---------------------------------------------------------------------------

    Many commenters addressed this part of the proposal. Consumer 
groups, mortgage industry stakeholders, and a State agency were 
generally supportive of amending the comment, as well as recognizing 
PACE transactions as credit. Some of these commenters asserted that 
PACE transactions meet the definition of consumer credit under TILA and 
Regulation Z and should be treated as such. Several consumer groups 
stated that Congress's directive to prescribe rules for PACE financing 
under TILA assumes that PACE transactions will be treated as credit 
because the CFPB would otherwise have no authority to issue regulations 
under TILA, as TILA governs consumer credit. A State agency stated that 
PACE transactions are clearly a form of consumer credit, and that the 
proposed amendment appears to be the simplest and most efficient means 
of allowing PACE transactions to be subject to the requirements of TILA 
and Regulation Z. Some mortgage industry stakeholders and consumer 
groups stated that, as voluntary home-secured financing, PACE 
transactions are mortgages or their functional

[[Page 2444]]

equivalents and should be treated the same under TILA.
    A number of consumer groups and mortgage industry stakeholders 
stated that applying TILA's mortgage requirements to PACE transactions 
would curb abuses and help ensure consumers qualify and understand 
repayment obligations. Two consumer groups expressed support for 
applying the mortgage requirements under TILA and Regulation Z to PACE 
transactions and suggested a number of adjustments to enhance consumer 
protections. One credit union trade association stated that it was 
critical that consumers with PACE transactions have the same rights and 
protections as with other home-secured lending, particularly because 
foreclosure related to unpaid municipal levies may involve a faster 
process than a civil mortgage foreclosure.
    A number of commenters suggested covering PACE transactions as TILA 
credit would be important because the structure of PACE transactions 
creates risk for consumers or other stakeholders. Some consumer groups 
and mortgage industry stakeholders asserted that the role of private 
contractors in PACE transactions has spurred predatory practices. A few 
commenters indicated that alternatives to PACE financing, such as solar 
funds, home equity lines of credit, or second mortgages may be safer 
for consumers or carry lower fees or interest rates. One credit union 
league asserted various concerns about PACE financing, such as high 
interest rates, exploitation and targeting of vulnerable consumers, 
risks of losing homes, deceptive marketing practices, and a lack of 
disclosures. A few commenters made assertions about possible negative 
impacts of PACE financing on certain groups of consumers, including 
older Americans, lower-income consumers, consumers with limited English 
proficiency, and majority Black or Hispanic communities.
    Several commenters, including consumer groups, mortgage industry 
stakeholders, and environmental groups, asserted that treating PACE 
transactions like mortgages would ensure a level playing field for 
market participants. Some mortgage industry and consumer group 
stakeholders stated that the proposal would ensure that PACE 
transactions receive the same level of scrutiny and safeguards as non-
PACE mortgage products. One consumer group and one title insurance 
trade association stated that PACE transactions tend to come with 
higher costs, fees, and interest rates than non-PACE mortgage products, 
warranting scrutiny for the market. One environmental group commented 
that PACE companies effectively act like mortgage bankers without 
having to comply with banking or lending regulations.
    Many PACE industry stakeholders objected to treating PACE 
transactions as credit under TILA. Some commenters stated that PACE 
transactions are legally distinguishable from consumer credit. Several 
commenters, including PACE companies and a government sponsor, referred 
to State law or case law to assert that PACE transactions are not 
consumer credit or are property tax assessments. A PACE company stated 
that there is no legal difference between voluntary and involuntary tax 
assessments, and that voluntariness does not render a tax assessment 
consumer credit. This commenter also asserted that the proposal did not 
distinguish between voluntary and involuntary court judgments, which, 
like tax assessments and tax liens, were excluded from ``credit'' under 
existing comment 2(a)(14)-1.ii.
    PACE companies, trade associations, and a government sponsor of 
PACE programs asserted that covering PACE transactions as consumer 
credit under TILA would not be supported by EGRRCPA section 307 or 
other TILA provisions. Several commenters stated that treating PACE 
transactions as credit would be overreach because, they asserted, it 
would exceed Congress's narrow directive in EGRRCPA section 307 by 
applying TILA to all voluntary tax assessments and tax liens.
    Some commenters stated that the CFPB lacks statutory authority to 
regulate PACE transactions as proposed because they are tax assessments 
subject to State law and are not credit under TILA. A few commenters 
stated that EGRRCPA section 307's mandate was narrow, and that the term 
``consumer credit'' cannot be reasonably interpreted to include PACE 
transactions. A few commenters asserted that, if Congress had intended 
to make definitional changes and subject PACE transactions to further 
regulation beyond ability to repay and civil liability, it would have 
said so explicitly. A PACE company stated that EGRRCPA section 307 
would be superfluous if PACE transactions were TILA credit because they 
would already be covered. A few commenters asserted that TILA's 
preservation of governmental immunity from certain remedies is evidence 
that Congress did not intend TILA to apply generally to PACE 
transactions, since TILA liability generally attaches to creditors, and 
local governments would be creditors in PACE transactions.
    Several commenters took issue with the coverage of government 
sponsors of PACE programs. Eight Members of the U.S. Congress stated 
that local governments that levy PACE financing as property tax 
assessments are not ``creditors.'' Two membership organizations for 
local governments asserted that, since PACE government sponsors are 
plausibly the ``creditors'' in PACE transactions but are protected from 
civil and criminal penalties under TILA, the text of TILA itself 
forbids including PACE financing in the definition of credit. Another 
government association asserted that, while the public agency is the 
entity entering into the financing agreements, issuing bonds secured by 
the obligations, and bearing ultimate responsibility for their 
administration and enforcement, the public agency should not be treated 
as a creditor. One government sponsor asserted that the rule would have 
a disproportionate effect on its State and would significantly reduce 
PACE originations.
    Many local governments and a public PACE provider requested an 
exclusion for government-operated PACE programs. One public PACE 
provider stated, among other things, that such programs are designed to 
achieve public policy objectives, are subject to rigorous underwriting 
standards and other robust consumer protections, are not driven by a 
profit motive, and have not resulted in claims of abuse or negative 
outcomes. One nonprofit commenter asserted that the likelihood of 
fraud, deception, and abuse is virtually nil where a government entity 
alone administers a PACE program.
    Several commenters took issue with TILA coverage on the ground that 
PACE transactions run with the underlying property and are not personal 
liabilities. One PACE company asserted that, while TILA defines 
``credit'' to mean, in part, a ``right granted by a creditor to a 
debtor . . . , '' there are no ``debtors'' in PACE transactions--that 
``debtors'' are natural persons to whom the credit is extended, whereas 
PACE transactions are attached to the property and are not personal 
liabilities. Eight Members of the U.S. Congress, several PACE 
companies, trade associations, and a local government organization 
asserted that PACE transactions are not personal debts but rather tax 
assessments that are levied against and run with the land. One PACE 
company asserted that PACE transactions are not consumer credit because 
their primary purpose is to advance State environmental and economic 
policies, whereas TILA and Regulation Z define ``consumer credit'' in 
part to mean credit that is primarily

[[Page 2445]]

for personal, family, or household purposes. This commenter also stated 
that PACE transactions are attached to the property and are not 
personal debts.
    PACE companies, government sponsors, local government trade groups, 
a PACE industry trade association, an energy industry stakeholder, and 
eight Members of U.S. Congress opposed treating PACE transactions as 
mortgages under TILA. A PACE company stated that PACE does not meet 
TILA's definition of residential mortgage loan, in part because the 
lien will arise as a matter of State law pursuant to governments' power 
of taxation. A different PACE company stated that PACE transactions are 
not residential mortgage loans as defined in TILA. Several commenters, 
including PACE companies and a government sponsor, asserted that 
EGRRCPA section 307's directive to ``account for the unique nature'' of 
PACE transactions in prescribing regulations indicates that Congress 
did not intend to treat them as mortgage loans. One PACE company stated 
that the distinctions between principal and interest payments and 
property tax payments under TILA point to PACE transactions being 
distinct from mortgage loans. A PACE industry trade association and a 
PACE company, among others, asserted several differences between PACE 
transactions and mortgages, including that PACE transactions do not 
accelerate, are nonrecourse, and have longer foreclosure timelines. One 
PACE company stated that TILA's requirements are designed for higher 
dollar amount mortgages. The PACE company stated that PACE transactions 
are functionally and practically distinguishable from mortgages, and 
that they are significantly smaller than mortgages and therefore less 
risky for consumers. An environmental group and a PACE industry trade 
association stated that PACE assessments have structural protections 
that mortgages do not, including that consumers have years (versus 
months) for consumers to come current on their property taxes before 
local governments can initiate a foreclosure or tax sale.
    Numerous commenters, including eight Members of the U.S. Congress, 
home improvement contractors, and an environmental group, stated that 
treating PACE financing like a mortgage loan would disregard the unique 
nature of PACE transactions. The eight Members of the U.S. Congress 
characterized PACE transactions as land-secured municipal finance, and 
other commenters, including a PACE company, a government sponsor, and 
another industry stakeholder, characterized them as property tax 
assessments imposed by government entities to advance important public 
policy purposes as mandated by State law. Some commenters stated that 
State and local governments have authorized similar transactions for 
some time, and that such transactions have only been authorized for 
projects that advance public purposes dictated by State and local 
governments.
    Numerous commenters, including PACE companies, government sponsors, 
membership organizations for local governments, home improvement 
contractors, energy stakeholders, and others, expressed a wide variety 
of concerns about PACE transactions being subject broadly to TILA. They 
stated, for example, that broad TILA coverage would (1) exceed the 
mandate in EGRRCPA section 307, which required only ability-to-repay 
and civil liability regulations; (2) introduce substantial burden that 
would be unwarranted given the industry's progress on consumer 
protections in recent years; (3) deter industry actors from 
participating and render the programs nonviable or reduce PACE 
originations, which they stated would reduce access to credit, push 
consumers into more expensive forms of financing, or limit revenue 
options for State and local governments.
    Some commenters asserted that broad TILA coverage would be 
unwarranted. Some stated, for example, that the CFPB lacked 
sufficiently reliable, recent data or anecdotes to justify broad 
application of TILA to PACE transactions. Several commenters stated 
that data sources, including the data discussed in the PACE Report, 
reports issued by the California Department of Financial Protection and 
Innovation (California DFPI), and analysis from private bond rating 
agencies, for example, do not support the conclusion that PACE 
transactions are particularly harmful. Some commenters asserted that 
available data in fact demonstrates, for example, that PACE financing 
correlates with a negligible impact on credit outcomes; that PACE 
financing has relatively low delinquency rates, sometimes lower than 
general aggregate property taxes and mortgages; or that foreclosure 
rates for homes with a PACE lien are quite low. A PACE company asserted 
that only two claims have been made on the California Alternative 
Energy and Advanced Transportation Financing Authority (CAEATFA) loan 
loss reserve, which the commenter interpreted to mean that mortgage 
industry concerns relating to the priority status of PACE liens are 
overblown.
    Some commenters, including PACE companies and home improvement 
contractors, pointed to specific TILA requirements that they asserted 
would pose particular challenges if applied to PACE transactions. For 
example, a PACE company and a home improvement contractor stated that 
TILA's disclosure and appraisal requirements do not make sense or are 
overly costly for PACE transactions compared to other mortgages, in 
part because the time to close on a non-PACE mortgage is longer and the 
transaction is for a much larger dollar amount. PACE companies and home 
improvement contractors asserted that loan originator requirements 
would impose undue costs and could cause home improvement contractors 
to stop offering PACE financing to consumers, either by choice or 
because they could not satisfy applicable requirements under State law. 
A PACE company also stated that Regulation Z requirements as to the 
treatment of credit balances would inhibit prepayment of property 
taxes.
    Numerous commenters opposed PACE transactions being subject to the 
higher-priced mortgage loan appraisal requirement, including public and 
private industry stakeholders, home improvement contractors, and energy 
groups. A PACE company, an energy industry stakeholder, and home 
improvement contractor firms asserted that the higher-priced mortgage 
loan appraisal requirement would increase cost or delay and deter home 
improvement contractor participation in PACE programs. The PACE company 
stated that the higher-priced mortgage loan appraisal requirement and 
TILA's high-cost mortgage protections \101\ would effectively cap the 
rates and fees for PACE transactions, which could make PACE financing 
economically nonviable. One home improvement contractor firm stated 
that the cost of an appraisal, estimated to be $300-$500, is 
unnecessary because the current valuation process used by industry 
stakeholders is more conservative than receiving an appraisal. Two PACE 
companies and an industry trade association recommended permitting the 
use of automated valuation models (AVMs) instead of appraisals--they 
asserted that AVMs are effective and more efficient than appraisals and 
already permitted under California law.
---------------------------------------------------------------------------

    \101\ See the discussion of Sec. Sec.  1026.32 and 1026.34 for a 
full discussion of comments pertaining to the application of TILA's 
high-cost mortgage protections.
---------------------------------------------------------------------------

    Some commenters stated that applying TILA to PACE transactions

[[Page 2446]]

would delay PACE originations. Comments about delay in the context of 
specific TILA requirements, such as the TILA-RESPA integrated 
disclosure requirements for which there is a mandatory waiting period 
between disclosure and consummation, are discussed below. One home 
improvement contractor asserted that a delay would result in financial 
hardship for contractors who do not get paid until the consumer signs 
off on the project. Another commenter stated that this delay threatens 
the point-of-sale nature of PACE transactions, which would be 
detrimental because PACE transactions allow for emergency repairs and 
upgrades to help consumers obtain homeowners insurance.
    One PACE company asserted that TILA's right of rescission would not 
benefit consumers and would be confusing for consumers and burdensome 
for States. The commenter stated that PACE transactions are already 
subject to a right to cancel under State law and industry practice, 
including a five-day right for senior citizens under California law.
    A number of commenters, including an assessment administrator, PACE 
companies, government sponsors, bond counsel, a trade association for 
special districts, and a public PACE provider stated that the proposal 
would extend TILA coverage to many assessment financing transactions 
that are not commonly known as PACE. These commenters stated that this 
coverage would create concern and uncertainty for non-PACE financing. 
Some of these commenters asserted that coverage of non-PACE 
transactions would exceed the congressional mandate provided in EGRRCPA 
section 307 and impede State and local governments' ability to use 
their taxing and bonding authorities as they see fit. A public PACE 
provider recommended covering voluntary contractual assessments, 
instead of simply voluntary assessments, to avoid covering obligations 
arising from what the commenter referred to as traditional voluntary 
assessment districts.
    Many commenters, including PACE companies, a public PACE provider, 
home improvement contractors, eight Members of the U.S. Congress, an 
assessment administrator, an industry trade association, bond counsel, 
and a group of State attorneys general, stated that PACE transactions 
already have sufficient consumer protections in place. Some of these 
commenters stated that PACE transactions are already sufficiently 
regulated at the State and local levels. One trade association 
representing special districts stated that State and local regulations 
strike an effective balance of consumer protection and enabling PACE 
financing to achieve its objectives. Many commenters stated that PACE 
companies have instituted a series of additional consumer protections 
as well, including verifying project completion before payment, various 
consumer communications, and oversight of home improvement contractors. 
One environmental group stated that PACE programs are accountable to 
local government oversight.
    PACE industry stakeholders also stated that the rate of consumer 
complaints involving PACE transactions has been low. A PACE company and 
an industry trade association asserted that approximately one in 1,000 
PACE loans have prompted consumer complaints across several years. A 
different trade association stated that a California DFPI report on 
PACE showed only 69 complaints, and that all but two were resolved. Two 
PACE companies stated that the number of complaints has been trending 
down, suggesting that industry reforms have been effective at 
addressing the consumer protection issues from prior years.
    Many commenters stated that the proposal was premised on outdated 
concerns, and that the CFPB should have relied more heavily on more 
recent trends and information. Some commenters, including PACE 
companies, a State agency, and a government sponsor, stated that 
evidence, including evidence from the PACE Report and California DFPI 
reports, for example, demonstrates that consumer outcomes improved 
after California's and Missouri's consumer-protection legislation took 
effect. Citing to data from CAEATFA and the Institutional Investor 
Journal of Structured Finance, one PACE company asserted that PACE 
financing does not prevent subsequent home sales. This commenter also 
stated that PACE delinquency rates are improving, and that PACE 
customers are usually able to catch up on delinquent tax payments, 
noting that 461 PACE delinquencies were reflected in a 2021 annual 
report, down from 889 delinquencies in the previous year's report. 
Eight Members of the U.S. Congress stated that the delinquency rate in 
Florida is lower than in California after its 2018 California PACE 
Reforms.
    A number of these commenters acknowledged that, before States and 
private industry stakeholders instituted consumer protection measures, 
there were concerns associated with PACE financing. Several commenters 
acknowledged that malfeasance by some home improvement contractors 
created risk and harm for consumers. One PACE company and a government 
sponsor stated that home improvement contractor malfeasance included, 
for example, misrepresentation, forging signatures on the loan 
contracts or completion certificates, creating false business records 
or contact information, and simply disappearing after the proceeds were 
disbursed. One State regulator stated that around 45 percent of 
claimants under a State-established financial restitution program for 
consumer fraud in residential solar purchases from licensed contractors 
were PACE customers, and that most of the relevant contracts were 
executed before the 2018 California PACE Reforms took effect.
    Several consumers who reported receiving a PACE transaction 
described various protections and benefits that they received 
associated with the loan. They asserted, for example, that the PACE 
transactions provided financing for home improvements on a short 
timeline and lowered their homeowner's insurance premiums. One home 
improvement contractor estimated that 90 percent of homeowners that the 
company has helped secure a PACE loan have benefited from the program.
    Several commenters asserted positive impacts and benefits of PACE 
transactions, which they asserted the proposed rule would diminish. 
Examples included (1) increased home values, (2) increased access to 
homeowner's insurance, (3) better access to credit for some consumers, 
(4) job creation, (5) environmental benefits, (6) lower utility bills, 
and (7) positive impacts for small businesses. One environmental group 
commented that PACE transactions are unique because they provide 
affordable, equitable, fixed-rate financing for homeowners to achieve 
public policy goals.
    Some commenters stated that PACE programs are uniquely designed to 
help the environment and communities by facilitating green and 
disaster-resilient homes. One public PACE provider, in discussing a 
recent history of natural disasters, characterized PACE financing as a 
critical public policy and public safety tool. One PACE company stated 
that local governments can tailor their PACE programs to serve the 
individual community needs.
    Several commenters also stated that PACE transactions represent a 
better alternative to other financing options. An individual commenter 
stated that PACE financing provides low-cost private capital funding to 
consumers, and that given current high interest rates on credit cards, 
a reduction in the availability of PACE financing would be

[[Page 2447]]

troubling for their State. An environmental group stated that the 
proposal would reduce PACE funding access, which would push homeowners 
into more expensive, less equitable financing options that do not vet 
or monitor contractors or contain anti-consumer clauses like variable 
rates or prepayment penalties.
    PACE industry stakeholders also identified certain elements of the 
transactions that the commenters asserted make PACE transactions more 
affordable, understandable, or secure. These included assertions that 
PACE transactions are nonrecourse and do not accelerate upon default, 
and that the total loan amount correlates to the property value and a 
loan term that cannot exceed the useful life of the home improvement 
that is financed with the PACE loan. Commenters asserted that PACE 
transactions carry a relatively low fixed interest rate, require no 
downpayment, have no prepayment penalty, and fully amortize. Commenters 
noted that home improvement contractors typically receive no payment 
until the project is complete, and that PACE transactions can help 
lower insurance premiums for homes that have been improved with a 
completed PACE financed project. An industry trade association for the 
PACE industry asserted that PACE financing is less risky than home 
equity lines of credit or a second mortgage, which the commenter said 
can strip equity without a corresponding home improvement project that 
would increase property value.
    At least three commenters expressed concern that the proposed rule, 
if finalized, would interfere with State consumer protection laws that 
apply to PACE transactions. A PACE company, a government sponsor, and a 
trade association asserted that the proposed rule would complicate or 
conflict with existing State laws, or interfere with States' ability to 
adjust their laws to address concerns over time. One commenter 
suggested this could possibly result in preemption of State laws.
    A number of commenters, including State attorneys general, PACE 
companies, and bond counsel, stated that regulating PACE transactions 
in this rulemaking would be unconstitutional under principles of 
federalism, sovereign immunity, and commandeering. Several commenters 
asserted that the CFPB's proposal would encroach on States' rights to 
use local taxing and bonding authorities as they see fit.
    Numerous commenters asserted that the proposal could have an impact 
on access to credit for home improvements to improve energy efficiency 
of homes or to strengthen homes' resilience to withstand natural 
disasters. A bank that provides PACE funding stated that PACE financing 
provides access to capital to many borrowers who would otherwise be 
unable to pay for energy efficiency, renewable energy, or resilience 
home improvements. Members of the U.S. Congress stated that PACE 
transactions provide low-to-moderate income families with access to 
affordable financing for retrofits and energy efficient home 
improvements.
    Numerous commenters, including but not limited to eight Members of 
the U.S. Congress, PACE companies, and a government association, stated 
that PACE financing helps consumers obtain, maintain, or reduce the 
cost of homeowner's insurance. A home improvement contractor asserted 
that the homeowners that use PACE financing are the most vulnerable to 
high energy bills and/or catastrophic damage to their homes during a 
strong storm or hurricane. One environmental group asserted that 
California protections caused reduced PACE originations at a time when 
there are not enough financing opportunities to meet what they cast as 
overwhelming needs.
    For the reasons set forth herein, the CFPB is finalizing its 
proposed amendment to comment 2(a)(14)-1.ii. As finalized, amended 
comment 2(a)(14)-1.ii states that involuntary tax liens, involuntary 
tax assessments, court judgments, and court approvals of reaffirmation 
of debts in bankruptcy are not considered credit for purposes of the 
regulation. By adding the word ``involuntary'' in several places to 
modify the tax assessments and tax liens excluded under comment 
2(a)(14)-1.ii, the CFPB clarifies that the comment does not exclude tax 
liens and tax assessments that arise from voluntary contractual 
agreements, such as PACE transactions. Thus, tax liens and tax 
assessments that are voluntary will be credit subject generally to TILA 
if they meet the definition of credit under TILA and Regulation Z and 
are not otherwise excluded.\102\
---------------------------------------------------------------------------

    \102\ Under the finalized amendment, tax liens and tax 
assessments that are not voluntary for the consumer would continue 
to be excluded.
---------------------------------------------------------------------------

    The amendment brings the exclusion in comment 2(a)(14)-1.ii in line 
with the plain text definition of credit in TILA. TILA defines 
``credit'' to mean the ``right granted by a creditor to a debtor to 
defer payment of debt or to incur debt and defer its payment,'' and 
Regulation Z defines ``credit'' as ``the right to defer payment of debt 
or to incur debt and defer its payment.'' \103\
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
---------------------------------------------------------------------------

    PACE transactions easily fit these definitions--the agreements 
provide for consumers to receive funding for home improvement projects 
and repay those funds over time in installments.\104\ Consumers 
voluntarily incur these financial obligations and are signatories to 
the financing agreements. In brief, consumers choose to take out the 
PACE debt obligation and must repay it over time.\105\
---------------------------------------------------------------------------

    \104\ Treating PACE transactions as TILA credit is consistent 
with the FTC's assertion of claims against a PACE company under the 
CFPB's Regulation N, 12 CFR part 1014, which the parties settled 
pursuant to a proposed court order. See Stipulation as to Entry of 
Order for Permanent Injunction, Monetary Judgement, and Other Relief 
(Oct. 28, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Stipulation%20-%20Dkt.%202%20-%2022-cv-07864.pdf; see also part II.A 
(describing the settlement). Regulation N, also known as the 
Mortgage Acts and Practices--Advertising Rule, implements section 
626 of the Omnibus Appropriations Act, 2009, as amended. 12 U.S.C. 
5538. Regulation N applies to the advertising, marketing, and sale 
of a ``mortgage credit product,'' defined as ``any form of credit 
that is secured by real property or a dwelling and that is offered 
or extended to a consumer primarily for personal, family, or 
household purposes.'' 12 CFR 1014.2. Regulation N defines ``credit'' 
identically to Regulation Z but does not include any commentary 
analogous to comment 2(a)(14)-1.ii to Regulation Z.
    \105\ See also, 89 FR 68086, 68087 (Aug. 23, 2024); 89 FR 61358, 
61360 (July 31, 2024).
---------------------------------------------------------------------------

    That PACE transactions are repaid alongside property tax payments, 
do not accelerate, are nonrecourse, or can remain with the property 
after the consumer sells the home does not change the fundamental 
nature of the transaction. Nor do other reasons commenters asserted for 
why PACE transactions should not be treated as TILA credit--including 
that PACE financing is authorized for important public policy purposes 
under State law, may have characteristics that differ from other types 
of mortgage obligations, or has produced benefits for industry 
participants and communities. That States may also have laws in place 
for PACE financing is similarly immaterial.\106\
---------------------------------------------------------------------------

    \106\ States have rules in place governing transactions that may 
also be subject to TILA, including, for example, door-to-door sales 
(see, e.g., Idaho Admin. Code r. 04.02.01.160; Ohio Admin. Code 
109:4-3-11; Utah Admin. Code r. R152-11-9; Wis. Admin. Code ATCP 
Sec.  127.62) and home improvement contractor work (see, e.g., Haw. 
Rev. Stat. secs. 444-1 to 444-36; Haw. Code R. secs. 16-77-1 to 16-
77-117; La. Stat. secs. 37:2150 to 37:2764; N.J. Stat. secs. 17:16C-
62 to 17:16C-94; N.J. Stat. secs. 17:16C-95 to 17:16C-103; N.J. 
Stat. sec. 56:8-151; Wash. Rev. Code secs. 19.186.005 to 
19.186.060). In response to commenters' concerns that the proposed 
rule, if finalized, would interfere with State consumer-protection 
laws that apply to PACE transactions, the CFPB notes that TILA 
preempts State disclosure laws only if they are ``inconsistent'' 
with it. TILA section 11(a), 15 U.S.C. 1610(a); 12 CFR 
1026.28(a)(1). Additionally, any State may apply to the CFPB to 
exempt a class of transactions within the State from certain TILA 
and Regulation Z provisions if the State's law is substantially 
similar to the Federal law (or, for credit billing provisions, 
affords the consumer greater protection than the Federal law) and 
there is adequate provision for enforcement. 15 U.S.C. 1633; 12 CFR 
1026.29(a).

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[[Page 2448]]

    Covering PACE transactions as credit under TILA notwithstanding 
these characteristics is consistent with the treatment of other covered 
credit transactions. For example, TILA explicitly treats other 
nonrecourse obligations as consumer credit,\107\ and many mortgages are 
effectively nonrecourse under State anti-deficiency statutes.\108\ 
Other forms of TILA-covered financing may also advance important public 
policy purposes under State law. To the extent there are unique aspects 
of PACE transactions that warrant adjustments, as mandated by EGRRCPA, 
the CFPB is codifying amendments or exemptions to that end, as 
described below.\109\ The amendment to comment 2(a)(14)-1.ii does not 
specifically address the coverage or characteristics of PACE 
transactions; it merely removes ambiguity that the existing regulatory 
comment may have created, and that is not reflected in the statute's 
definition of ``credit.'' Indeed, the original text of comment 
2(a)(14)-1.ii was not intended to impinge on the statutory coverage of 
voluntary transactions, such as PACE. The Board of Governors of the 
Federal Reserve System (Board) issued the comment in 1981 when it 
officially ``adopted, in substance'' existing staff opinion letters 
regarding Regulation Z.\110\ In preamble and in several such letters 
preceding issuance of the 1981 official staff interpretation, the Board 
was clear that in addressing only whether certain involuntary tax and 
assessment obligations were credit under TILA and Regulation Z. In one 
letter, the Board stated that the definition of ``credit'' 
``necessarily assumes the right to avoid incurring debt. That is, the 
debt must arise from a contractual relationship, voluntarily entered 
into, between the debtor and creditor.'' \111\ Because ``such a 
relationship [did] not exist in the delinquent tax arrangement case,'' 
the Board found that TILA and Regulation Z ``would not govern the 
transaction.'' \112\
---------------------------------------------------------------------------

    \107\ See e.g., 12 CFR 1026.33 (requirements applicable to 
nonrecourse reverse mortgages).
    \108\ See generally Alaska Stat. sec. 34.20.090; Ariz. Rev. 
Stat. secs. 33-814(G), 33-729(A); Cal. Civ. Proc. Code secs. 580a-
580d; Haw. Rev. Stat. sec. 667-38; Minn. Stat. sec. 582.30; Mont. 
Code secs. 71-1-232, 71-1-317; Nev. Rev. Stat. secs. 40.455, 40.458, 
40.459; N.C. Gen. Stat. secs. 45-21.36, 45-21.38, 45-21.38A; N.D. 
Cent. Code sec. 32-19-03; Okla. Stat. tit. 12, secs. 686, 765, 773; 
Okla. Stat. tit. 46, sec. 43; Or. Rev. Stat. sec. 86.797(2); Wash. 
Rev. Code secs. 61.24.100.
    \109\ The considerations discussed in this section as to why 
PACE transactions should not be subject to TILA also generally apply 
with respect to other voluntary transactions that involve an 
assessment on the property and are repaid through the property tax 
system, even when they are not commonly known as PACE transactions.
    \110\ See 46 FR 50288, 50288, 50292 (Oct. 9, 1981).
    \111\ Fed. Rsrv. Bd., Public Information Letter No. 166 (1969).
    \112\ Id.
---------------------------------------------------------------------------

    Other staff opinion letters contained similar analyses,\113\ and 
the Board reiterated this reasoning in final rule preamble shortly 
before issuing the 1981 official staff interpretation, again focusing 
on the involuntary nature of the obligations as the reason they were 
not credit.\114\ The Board explained:
---------------------------------------------------------------------------

    \113\ See Fed. Rsrv. Bd., Public Information Letter No. 153 
(1969) (finding that sewer assessment installment payments did not 
arise ``from a contractual relationship voluntarily entered into, 
between debtor and creditor'' and thus, that TILA and Regulation Z 
would not apply); Fed. Rsrv. Bd., Public Information Letter No. 40 
(1969) (``[T]he term `credit', for the purposes of Truth-in-Lending, 
assumes a contractual relationship, voluntarily entered, between 
creditor and debtor. Since such a relationship [did] not exist in 
the case of tax assessments by the Sewer District (and, similarly in 
the case of ad valorem taxes imposed by a city), . . . such 
assessments (and city taxes) would not fall within the coverage of 
[TILA] or Regulation Z.'').
    \114\ 46 FR 20848, 20851 (Apr. 7, 1981).

    Certain transactions do not involve the voluntary incurring of 
debt; others do not involve the right to defer a debt. Tax liens, 
tax assessments and court judgments (including reaffirmations of a 
debt discharged in bankruptcy, if approved by a court) fall into 
this category and are therefore not covered by the regulation.\115\
---------------------------------------------------------------------------

    \115\ Id.

    Moreover, in this preamble and in the 1981 official staff 
interpretation, the Board specifically juxtaposed the excluded 
obligations with voluntary ones, stating that, while the obligations it 
was excluding are not credit, ``third-party financing of such 
obligations (for example, obtaining a bank loan to pay off a tax lien) 
would constitute credit for Truth in Lending purposes.'' \116\ There is 
no indication that, in issuing the comment excluding tax liens and tax 
assessments, the Board had considered any tax lien or tax assessment 
that had originally arisen from a voluntary contractual agreement.\117\
---------------------------------------------------------------------------

    \116\ Id.; see also 46 FR 50288, 50292 (Oct. 9, 1981) (adopting 
the relevant comment with the same language). In 2011, the authority 
to interpret TILA and implement Regulation Z transferred to the 
CFPB, which republished the 1981 Board interpretation as an official 
CFPB interpretation in comment 2(a)(14)-1.ii with no substantive 
changes.
    \117\ With regard to the comment noting that the proposal did 
not distinguish between voluntary and involuntary court judgments, 
which are also discussed in comment 2(a)(14)-1.ii, those 
transactions are distinct from PACE transactions and are outside the 
scope of this rulemaking.
---------------------------------------------------------------------------

    Recognizing PACE financing as TILA credit is consistent not only 
with TILA's definition of ``credit,'' but with the goals of EGRRCPA 
section 307. By directing the CFPB to prescribe certain regulations for 
PACE financing under TILA, in EGRRCPA section 307, Congress evinced its 
intent for PACE transactions to be covered as TILA credit, in line with 
the text of the statute. To the extent there has been uncertainty as to 
whether PACE financing is credit under TILA, EGRRCPA section 307's 
explicit choice to address PACE financing using TILA resolves the 
question.
    More generally, Congress enacted TILA in part to enable consumers 
``to compare more readily the various credit terms available'' to them, 
and to ``avoid the uninformed use of credit.'' \118\ Many commenters 
noted that PACE financing can be used in place of other forms of 
consumer credit (including home equity lines of credit, personal loans, 
credit cards, and mortgage loans) but there was no consensus on which 
product was best for the consumer. Ensuring that consumers can compare 
these alternatives promotes competition and falls squarely within the 
congressional intent and purpose of TILA. Commenters concerned about 
coverage of PACE transactions under TILA provided no compelling reason 
why consumers should not receive the same disclosures and protections 
when entering into a PACE transaction as when entering into any other 
financing transaction that could result in the loss of their home. 
Additionally, clarifying that voluntary tax liens and tax assessments 
may still qualify as TILA credit is necessary to prevent circumvention 
or evasion of TILA's purposes, including as to PACE transactions.
---------------------------------------------------------------------------

    \118\ TILA section 102(a), 15 U.S.C. 1601(a).
---------------------------------------------------------------------------

    Regarding comments opposing TILA coverage because PACE transactions 
attach to the property, the CFPB notes that PACE transactions are 
offered or extended to consumers. Unlike involuntary tax assessments 
and liens,\119\ which are imposed upon real property as a function of 
ownership and without the owner's specific consent, PACE transactions 
cannot be completed without a natural person (the homeowner) signing a 
voluntary

[[Page 2449]]

financing agreement secured by their home; these transactions, like 
other mortgage transactions, are always offered or extended to 
consumers and are secured by residential real property that they 
personally own.\120\
---------------------------------------------------------------------------

    \119\ In response to the suggestion to carve out voluntary 
contractual assessments from the credit exclusion, the CFPB 
concludes that adding the word ``involuntary'' into comment 
2(a)(14)-1.ii appropriately distinguishes between transactions that 
the consumer chooses to enter into and transactions that are not 
voluntary for the consumer.
    \120\ See 12 CFR 1026.1(c)(1)(i) (stating one of the four 
conditions of Regulation Z coverage is when ``[t]he credit is 
offered or extended to consumer''); see also 12 CFR 1026.2(a)(12) 
(defining ``consumer credit'' as that which is ``offered or extended 
to a consumer primarily for personal, family, or household 
purposes''); see also Fla. Stat. sec. 163.081(2) (``The owner of 
record of the residential property within the jurisdiction of an 
authorized program may apply to the authorized program administrator 
to finance a qualifying improvement. The program administrator may 
only enter into a financing agreement with the property owner.''); 
Cal. Sts. & Hwys. Code sec. 5898.20 (authorizing the creation of 
PACE programs whereby ``public agency officials and property owners 
may enter into voluntary contractual assessments for public 
improvements and to make financing arrangements'').
---------------------------------------------------------------------------

    Moreover, consumers who agree to PACE transactions are functionally 
responsible for ensuring their repayment. PACE transactions are either 
repaid, with interest, alongside regular property tax payments, or, if 
those payments are not made, at a tax sale or foreclosure. Further, as 
several mortgage industry stakeholders noted, before a PACE borrower 
can refinance a home or sell it, they typically must pay off the 
remaining balance on the PACE transaction or reduce the sales price to 
account for the existing lien.\121\ In this way, transferring a home 
with an outstanding PACE transaction is no different than transferring 
a property subject to any other outstanding lien or mortgage.
---------------------------------------------------------------------------

    \121\ Most home buyers are unwilling to take on the remaining 
payment obligation for a PACE lien, or their mortgage lender 
prohibits them from doing so. Guidelines from both Fannie Mae and 
Freddie Mac generally prohibit purchase of mortgages on properties 
with outstanding first-lien PACE obligations. See Fannie Mae, 
Property Assessed Clean Energy Loans (Dec. 16, 2020), https://selling-guide.fanniemae.com/sel/b5-3.4-01/property-assessed-clean-energy-loans and Freddie Mac, Refinance of Mortgages secured by 
properties subject to an energy retrofit loan (Sept. 4, 2024), 
https://guide.freddiemac.com/app/guide/section/4301.8. Similarly, 
the FHA updated its handbook requirements in 2017 to prohibit 
insurance of mortgage on properties with outstanding first-lien PACE 
obligations, see U.S. Dept. of Hous. & Urb. Dev., Property Assessed 
Clean Energy (PACE) (Dec. 7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf.
---------------------------------------------------------------------------

    Because PACE transactions are credit secured by residential real 
property, removing the exclusion in comment 2(a)(14)-1.ii as to 
voluntary tax assessments and tax liens ensures that PACE loans are 
subject to TILA's mortgage requirements. For example, various 
disclosure and other requirements will apply to the entity that is the 
``creditor'' as defined in Sec.  1026.2(a)(17), which the CFPB 
understands is typically the government sponsor in a PACE 
transaction.\122\ Other requirements will apply to any entity that 
operates as a ``loan originator'' for a PACE transaction, which could 
include a PACE company or home improvement contractor depending on the 
roles those entities play in a particular transaction.\123\ Thus, the 
clarification is necessary to effectuate the purposes of the statute, 
such as ensuring the meaningful disclosure of credit terms to enable 
the consumer to comparison shop.\124\ Ensuring that voluntary consumer 
transactions such as PACE are subject to the same protections as other 
credit products with similar characteristics strengthens competition 
among financial institutions and other firms engaged in the extension 
of consumer credit.\125\
---------------------------------------------------------------------------

    \122\ Implementing TILA section 103(g), Sec.  1026.2(a)(17) 
defines ``creditor'' generally as a person who regularly extends 
consumer credit that is subject to a finance charge or is payable by 
written agreement in more than four installments, and to whom the 
obligation is initially payable. The CFPB's understanding, 
consistent with comments in response to the proposed rule and other 
research, is that these characteristics apply to government sponsors 
of PACE transactions in the PACE programs that have been active.
    \123\ Section 1026.36(a)(1) generally defines a ``loan 
originator'' as a person who, in expectation of direct or indirect 
compensation or other monetary gain or for direct or indirect 
compensation or other monetary gain, performs any of the following 
activities: takes an application, offers, arranges, assists a 
consumer in obtaining or applying to obtain, negotiates, or 
otherwise obtains or makes an extension of consumer credit for 
another person; or through advertising or other means of 
communication represents to the public that such person can or will 
perform any of these activities. See the section-by-section analysis 
of Sec.  1026.41 for discussion of servicing provisions in 
Regulation Z.
    \124\ See 15 U.S.C. 1601(a).
    \125\ Id.
---------------------------------------------------------------------------

    Regarding comments raising concerns about the costs or operational 
challenges that the higher-priced mortgage loan appraisal rule could 
introduce, the CFPB notes that TILA section 129H(b)(4) provides the 
CFPB and certain other agencies with joint rulemaking and exemption 
authority with respect to the higher-priced mortgage loan appraisal 
rule.\126\ As such, any future rulemaking relating to an higher-priced 
mortgage loan appraisal rule exemption would need to be considered and 
issued jointly by the CFPB, Board, FDIC, OCC, NCUA, and FHFA; the 
agencies would need to determine that ``the exemption is in the public 
interest and promotes the safety and soundness of creditors.''
---------------------------------------------------------------------------

    \126\ 15 U.S.C. 1639h(b)(4). Specifically, the agencies with 
joint rulemaking and exemption authority for the higher-priced 
mortgage loan rule are the CFPB, the Board of Governors of the 
Federal Reserve System (Board), the Federal Deposit Insurance 
Corporation (FDIC), the Office of the Comptroller of the Currency 
(OCC), the National Credit Union Association (NCUA), and the Federal 
Housing Finance Agency (FHFA). See TILA section 129H(b)(4)(A), 15 
U.S.C. 1639h(b)(4)(A).
---------------------------------------------------------------------------

    Regarding concerns that TILA coverage would delay PACE 
originations, other products that meet the statutory definition of 
credit, including home equity lines of credit, personal loans, credit 
cards, or second mortgages, may also be used for home improvement 
projects and emergency repairs. As discussed below, work on a home 
improvement project frequently does not and cannot start 
immediately,\127\ and to the extent there is urgency to originate a 
PACE transaction, there are regulatory mechanisms to permit consumers 
to modify or waive the mandatory waiting periods and receive the PACE 
loan early, including the bona fide personal financial emergency 
exception to the TRID waiting periods.\128\ Moreover, many commenters 
pointed to the point-of-sale business practice common to PACE financing 
as contributing to increased consumer risk. TILA coverage of PACE 
transactions will thus help consumers compare the various available 
credit terms and ensure competition among the various financial 
institutions and other firms engaged in the extension of consumer 
credit.\129\
---------------------------------------------------------------------------

    \127\ See part VI.D.
    \128\ See 12 CFR 1026.19(e)(1)(v) and (f)(1)(iv).
    \129\ See 15 U.S.C. 1601(a).
---------------------------------------------------------------------------

    The CFPB declines to adopt other exemptions recommended by 
commenters, including with regard to PACE programs administered by 
governments without the assistance of private PACE companies, 
government units as ``creditors'' under TILA with respect to PACE 
transactions, or PACE transactions secured by subordinate liens. 
Although some of these factors could lower risks for consumers, they do 
not affect whether a PACE transaction is credit under TILA. PACE 
consumers in these circumstances will benefit from TILA protections in 
the ways Congress intended when codifying TILA's protections.
    Recent efforts by States and PACE industry stakeholders to enhance 
consumer protections do not make TILA requirements less meaningful for 
PACE consumers. Further, as the PACE industry continues to grow, some 
States may not impose consumer protection requirements similar to those 
under TILA, and new private participants may enter the industry that do 
not share the same commitment to consumer protections as current 
industry stakeholders have shown in recent years. For example, as some 
commenters asserted, while PACE borrowers may have more time to come

[[Page 2450]]

current on late payments than on a traditional home mortgage, these 
protections are highly variable from State to State, and the ultimate 
result may be the same--the loss of one's home due to default. The PACE 
Report demonstrates--and a number of industry stakeholders acknowledged 
in comments--that, in previous years, PACE financing created 
significant risk for consumers. Nonetheless, TILA applies regardless of 
the current level of risk in any specific credit market.
    In response to comments asserting the rule unconstitutionally 
restricts States' tax powers, the CFPB notes that PACE transactions are 
voluntary financing agreements between homeowners and creditors that do 
not implicate or restrict States' sovereign taxation authority. 
Moreover, Federal limits on State taxation are authorized under the 
Commerce Clause, and treating PACE transactions as TILA credit does not 
violate commandeering or related federalism principles. Congress 
expressly directed the application of ability-to-repay rules and civil 
liability provisions to PACE transactions in EGRRCPA section 307. 
Rather than directing States to enact, administer, or enforce a Federal 
program, the rule implements Congress's mandate in EGRRCPA section 307 
to ensure that States choosing to extend PACE credit to consumers 
comply with applicable Federal requirements.
    The CFPB finalizes the amendment to comment 2(a)(14)-1.ii pursuant 
to its authority under TILA section 105(a) and consistent with EGRRCPA 
section 307. The amendment is necessary and proper to carry out TILA's 
purposes and prevent circumvention or evasion thereof, including the 
purposes of assuring the meaningful disclosure of credit terms and 
avoiding the uninformed use of credit. Additionally, EGRRCPA section 
307 directs the CFPB to prescribe certain regulations for PACE 
financing under TILA, which governs credit transactions. The amendment 
to comment 2(a)(14)-1.ii is necessary to remove any ambiguity that the 
original comment created as to PACE transactions and to carry out 
congressional intent, both as to TILA and EGRRCPA.
1026.32 Requirements for High-Cost Mortgages and 1026.34 Prohibited 
Acts or Practices in Connection With High-Cost Mortgages
    The Home Ownership and Equity Protection Act (HOEPA) amended TILA 
in 1994 to address abusive practices in refinancing and home-equity 
mortgage loans with high interest rates or high fees.\130\ The 
provisions of HOEPA are implemented in Regulation Z in Sec. Sec.  
1026.32 and 1026.34.\131\
---------------------------------------------------------------------------

    \130\ Public Law 103-325, 108 Stat. 2160.
    \131\ 12 CFR part 1026.
---------------------------------------------------------------------------

    The CFPB did not propose any changes to these provisions and is not 
amending them in this final rule. Sections 1026.32 and 1026.34 will 
apply to PACE transactions that are high-cost mortgages under Sec.  
1026.32(a)(1) in the same way as other high-cost mortgages.\132\ The 
CFPB requested comment on whether any clarification was required with 
respect to how HOEPA's provisions, as implemented in Regulation Z, 
apply to PACE transactions that may qualify as high-cost mortgages.
---------------------------------------------------------------------------

    \132\ A mortgage is generally a high-cost mortgage if (1) the 
spread between the APR and the average prime offer rate (APOR) is 
greater than 6.5 percentage points for a first-lien transaction or 
8.5 percentage points for a subordinate-lien transaction, (2) points 
and fees exceed 5 percent of the total loan amount (for loans under 
$20,000) or the lesser of 8 percent or $1,000 (for loans over 
$20,000), or (3) the creditor can charge prepayment penalties more 
than 36 months after consummation or in an amount exceeding 2 
percent of the amount prepaid. 12 CFR 1026.32(a)(1). As discussed in 
the PACE Report, the CFPB estimates that a small percentage of PACE 
transactions would exceed the APR-APOR spread trigger, while over 
one-third of existing PACE transactions have points and fees that 
would exceed the HOEPA points and fees coverage trigger. PACE 
Report, supra note 12, at 15.
---------------------------------------------------------------------------

    Several commenters supported requiring HOEPA compliance for PACE 
loans. A credit union trade association asserted that HOEPA should 
apply, to ensure that consumers with PACE loans receive the same 
protections as those with other mortgage loans. In response to the 
CFPB's specific request for comment on the treatment of late fees, 
consumer group commenters opposed distinguishing late fees that apply 
under property tax law from those that are imposed by the PACE 
contract. They recommended specifying that there is no distinction. 
They asserted that such a distinction would contravene the intent of 
HOEPA--to protect vulnerable consumers who receive relatively expensive 
mortgage loans--because property tax late penalties can be significant 
and must be paid on top of interest required by the PACE financing 
agreement.
    A State agency similarly stated that HOEPA's late fee limitations 
should not be relaxed for PACE loans. This commenter pointed to the 
HOEPA provision concerning late payment charges at Sec.  
1026.34(a)(8)(iv), which the commenter characterized as punitive for 
consumers who are more likely to default. The commenter also stated 
that PACE lenders should not be permitted to increase interest rates 
after default; it asserted that doing so could force borrowers who are 
having difficulty into foreclosure or inescapable debt.
    A PACE company, an industry trade association, and a PACE 
government sponsor asserted that requiring HOEPA compliance would 
inhibit PACE originations. A PACE company stated that HOEPA application 
would make PACE lending cost-prohibitive or economically nonviable. 
Several asserted that HOEPA would increase compliance costs. A PACE 
industry trade association and a government sponsor asserted that PACE 
programs are already costly to administer due to certain consumer 
protections or consumer benefits, and that the CFPB failed to consider 
these factors in proposing to subject PACE transactions to HOEPA's 
requirements.
    A PACE company and a government sponsor asserted that requiring 
HOEPA compliance would effectively cap the price of PACE loans. A PACE 
company and an industry trade association opposed HOEPA application 
because PACE transactions are smaller and generate less revenue than 
many other high-cost mortgage loans. The trade association stated that 
lower revenue and higher origination costs make it more difficult to 
originate PACE loans and come in under the high-cost thresholds. One 
PACE company asserted that, if the CFPB does not exempt PACE loans, it 
should raise the applicable HOEPA thresholds for PACE transactions. 
Some PACE industry commenters addressed high-cost requirements in 
combination with higher-priced mortgage loan requirements, generally 
opposing both sets of requirements.
    One PACE company commented that two high-cost requirements in 
Regulation Z would make compliance difficult or impossible: the 
prohibition on loan proceeds being paid to home improvement contractors 
under Sec.  1026.34(a)(1), and housing counseling certification 
requirements under Sec.  1026.34(a)(5).
    Having considered the comments, the CFPB has determined not to 
adjust the HOEPA requirements for PACE loans. As described in the 
discussion of Sec.  1026.2(a)(14), the CFPB is amending commentary to 
Regulation Z to clarify that voluntary transactions such as PACE are 
credit under TILA notwithstanding their integration into the property 
tax system. Consumers receiving high-cost PACE loans should receive 
HOEPA protections just as consumers receiving other high-cost mortgage 
loans do.
    For example, the additional disclosures and credit counseling

[[Page 2451]]

requirements will ensure consumers are provided information to inform 
their credit decisions,\133\ and restrictions on certain riskier loan 
features will enhance the safety of the loans.\134\ Additionally, the 
limitations on fees that can be charged for payoff statements may make 
it easier for consumers who receive high-cost PACE loans to access loan 
information at minimal cost, which could be useful in light of the 
final rule's exemption of PACE loans from the periodic statement 
requirement under Sec.  1026.41.\135\
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    \133\ See 12 CFR 1026.32(c) (disclosure requirements); 34(a)(5) 
(pre-loan counseling requirements).
    \134\ See 12 CFR 1026.32(d).
    \135\ See 12 CFR 1026.34(a)(9).
---------------------------------------------------------------------------

    More generally, weakening the HOEPA requirements for PACE loans 
would be inconsistent with the governing statute. Under TILA section 
129(p), the CFPB may exempt specific mortgage products or categories of 
mortgages from certain HOEPA prohibitions if the CFPB finds that the 
exemption (1) is in the interest of the borrowing public, and (2) will 
apply only to products that maintain and strengthen homeownership and 
equity protection.\136\
---------------------------------------------------------------------------

    \136\ 15 U.S.C. 1639(p).
---------------------------------------------------------------------------

    Limiting HOEPA application would neither be in the interest of the 
borrowing public nor maintain and strengthen homeownership and equity 
protection. As described in part II.A, the super-priority status of 
liens securing PACE loans means that the parties involved in 
originating PACE loans have limited incentive to ensure consumer 
understanding and affordability. This leaves consumers at risk.
    The findings in the PACE Report bear out these concerns. The PACE 
Report finds that more than 70 percent of PACE borrowers had pre-
existing non-PACE mortgages, and PACE industry commenters suggested 
that the true figure is closer to 90 percent. The PACE Report finds 
that PACE lending increased mortgage delinquency rates by 2.5 
percentage points over a two-year period--getting a PACE loan increased 
the risk of mortgage delinquency by about 35 percent.\137\ The PACE 
Report further finds that the probability of delinquency on a pre-
existing mortgage loan was substantially higher for PACE consumers with 
low credit scores--consumers in the sub-prime credit score group 
experienced an increase in mortgage delinquency almost two and a half 
times the average effect.\138\
---------------------------------------------------------------------------

    \137\ See PACE Report, supra note 12, at 4, 26-27.
    \138\ See id. at 36-37.
---------------------------------------------------------------------------

    The CFPB also notes that the exemption authority in TILA section 
129(p) does not apply to certain HOEPA requirements.
    The CFPB acknowledges, as industry commenters have noted, that 
lending practices and State law have evolved since the origination of 
the PACE loans reflected in the PACE Report, that consumers may choose 
to select PACE financing despite the higher costs relative to other 
forms of financing, and that PACE financing may help some consumers 
access credit or may advance public policy purposes. These 
considerations do not provide a basis for limiting HOEPA protections.
    Although some commenters asserted that the application of HOEPA 
protections would inhibit PACE lending or make it infeasible, the CFPB 
estimated that nearly two-thirds of PACE loans studied in the PACE 
Report would not have exceeded HOEPA thresholds (including nearly 90 
percent of PACE loans in Florida).\139\
---------------------------------------------------------------------------

    \139\ See id. at 15-16.
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    One PACE company asserted that HOEPA application would prevent 
payment of home improvement contractors with funds from the PACE loan. 
However, Regulation Z specifically allows for payment of home 
improvement contracts with loan proceeds in certain circumstances.\140\ 
Although one commenter expressed concern that HUD has not approved 
housing counseling for PACE loans, in general HUD does not approve 
housing counseling for particular types of mortgage loans. Current 
housing counseling requirements include counseling on topics such as 
financial literacy and budget planning, which are applicable 
irrespective of the loan product.\141\
---------------------------------------------------------------------------

    \140\ Section 1026.34(a)(1) prohibits payment to a contractor 
under a home improvement contract from the proceeds of a high-cost 
mortgage, other than (1) by an instrument payable to the consumer or 
jointly to the consumer and the contractor, or (2) at the election 
of the consumer, through a third-party escrow agent in accordance 
with terms established in a written agreement signed by the 
consumer, the creditor, and the contractor prior to the 
disbursement.
    \141\ Dep't of Hous. & Urb. Dev., Housing Counseling Program 
Handbook (7610.1) (Apr. 2024), https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh/7610.1.
---------------------------------------------------------------------------

1026.35 Escrow Accounts
1026.35(b) Exemptions
1026.35(b)(2)(i)
1026.35(b)(2)(i)(E)
    TILA section 129D generally requires creditors to establish escrow 
accounts for certain higher-priced mortgage loans.\142\ Regulation Z 
implements this requirement in Sec.  1026.35(a) and (b). The CFPB 
proposed to exempt PACE transactions from this higher-priced mortgage 
loan escrow requirement. For the reasons discussed in this section, the 
CFPB is finalizing the proposed exemption.
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 1639d.
---------------------------------------------------------------------------

    Regulation Z defines a higher-priced mortgage loan as a closed-end 
consumer credit transaction secured by the consumer's principal 
dwelling with an APR exceeding the average prime offer rate (APOR) 
\143\ for a comparable transaction by a certain number of percentage 
points.\144\ With certain exemptions, Regulation Z Sec.  1026.35(b) 
prohibits creditors from extending higher-priced mortgage loans secured 
by first liens on consumers' principal dwellings unless an escrow 
account is established before consummation for payment of property 
taxes, among other charges (higher-priced mortgage loan escrow 
requirement).
---------------------------------------------------------------------------

    \143\ Section 1026.35(a)(2) defines APOR as an APR that is 
derived from average interest rates, points, and other loan pricing 
terms currently offered to consumers by a representative sample of 
creditors for mortgage transactions that have low-risk pricing 
characteristics.
    \144\ 12 CFR 1026.35(a)(1) defines higher-priced mortgage loan 
to mean ``a closed-end consumer credit transaction secured by the 
consumer's principal dwelling with an APR that exceeds the APOR for 
a comparable transaction as of the date the interest rate is set'' 
by at least 1.5, 2.5, or 3.5 percentage points depending on the lien 
priority and the size of the loan relative to the maximum principal 
obligation eligible for purchase by Freddie Mac.
---------------------------------------------------------------------------

    The CFPB received comments on the proposed exemption from the 
higher-priced mortgage loan escrow requirement from consumer groups and 
public and private PACE industry stakeholders, none of which advocated 
for retaining the requirement for PACE transactions. A PACE company 
suggested increasing applicable thresholds to avoid higher-priced 
mortgage loan requirements generally, since PACE originators would have 
to do the same amount of work as non-PACE mortgage originators but 
receive only a fraction of the revenue. An industry trade association 
made a similar point, stating that the revenue from fees and interest 
from PACE loans is significantly smaller than that of non-PACE mortgage 
loans and that the higher-priced mortgage loan requirements would be 
unduly costly for PACE loans.
    The CFPB concludes that requiring escrow accounts for PACE 
transactions that would be subject to the higher-priced mortgage loan 
escrow requirement would provide little or no benefit to consumers and 
would introduce unnecessary challenges and costs associated with 
implementation and compliance.

[[Page 2452]]

    Many PACE borrowers already have escrow accounts through their pre-
existing mortgage loan.\145\ For these consumers, PACE payments are 
already incorporated into the mortgage escrow accounts as part of the 
property tax payment. The CFPB has determined that TILA's higher-priced 
mortgage loan escrow requirements are not warranted for PACE borrowers 
who do not have an escrow account with a pre-existing mortgage loan.
---------------------------------------------------------------------------

    \145\ The PACE Report estimated that nearly three-fourths of 
PACE borrowers had a mortgage loan at the time the PACE loan was 
consummated. See PACE Report, supra note 12, at 12. Several PACE 
industry commenters stated that the figure is closer to 90 percent.
---------------------------------------------------------------------------

    If PACE transactions had escrow accounts, those escrow accounts 
would be governed by rules in Regulation X.\146\ The rules include a 
variety of requirements governing, for example, escrow account 
analyses, escrow account statements, and the treatment of surpluses, 
shortages, and deficiencies in escrow accounts.\147\ Although these 
protections serve important consumer protection purposes with respect 
to the administration of escrow accounts for non-PACE mortgages, the 
consumer benefit for PACE loans is significantly reduced. Therefore, 
the CFPB has determined that requiring compliance would not be 
warranted for PACE loans given the lack of consumer benefit.\148\
---------------------------------------------------------------------------

    \146\ See generally Regulation X, 12 CFR 1024.17.
    \147\ Id.
    \148\ Commenters to the 2008 higher-priced mortgage loan escrows 
rule estimated that the cost could range between one million and $16 
million for a large creditor. See 73 FR 44521, 44558 (July 30, 
2008).
---------------------------------------------------------------------------

    Further, certain escrow account disclosures required under 
Regulation X \149\ and Regulation Z \150\ could be confusing in the 
context of PACE transactions. The escrow account disclosures were 
developed to address more traditional escrow accounts; they would not 
effectively communicate that an escrow account for a PACE transaction 
would collect the principal and interest payments for the PACE loan as 
part of the property tax payment. Additionally, the escrow account 
disclosures, if required for PACE transactions, might create 
uncertainty about whether the PACE transaction affects the consumer's 
pre-existing mortgage escrow account, when applicable.
---------------------------------------------------------------------------

    \149\ See 12 CFR 1024.17(g)-(j).
    \150\ See 12 CFR 1026.37, .38.
---------------------------------------------------------------------------

    To the extent consumers lack information about their overall 
payment obligations, and to the extent this could lead to them 
receiving unaffordable PACE loans, such concerns are better addressed 
through other TILA provisions, including the TILA-RESPA integrated 
disclosures and ability-to-repay requirements that are tailored to PACE 
as discussed further below.\151\ While an escrow account can help 
spread out payments and thereby reduce the risk of payment shock or 
default, the CFPB at this time concludes that the cost and complexity 
of doing so for the share of PACE borrowers without an existing escrow 
account outweigh the potential consumer benefits.
---------------------------------------------------------------------------

    \151\ See section-by-section analyses of Sec. Sec.  1026.37, 
1026.38, and 106.43, infra.
---------------------------------------------------------------------------

    The CFPB is adopting this exemption pursuant to TILA sections 
105(a) and 105(f). Exempting PACE transactions from the requirements of 
TILA section 125D is necessary or proper to effectuate the purposes of 
TILA. Having considered the factors enumerated in TILA section 105(f), 
the CFPB has determined that the requirements of TILA section 125D 
would not provide a meaningful benefit to consumers in the form of 
useful information or protection. In particular, the requirements of 
TILA section 125D would significantly complicate, hinder, and make more 
expensive the credit process for PACE transactions, and the goal of 
consumer protection would not be undermined by this exemption.
TILA-RESPA Integrated Disclosure Requirements Implemented Under 
Sections 1026.37 and 1026.38
    The CFPA directed the CFPB to integrate the mortgage loan 
disclosures required under TILA and RESPA sections 4 and 5, and to 
publish model disclosure forms to facilitate compliance.\152\ The CFPB 
issued regulatory requirements and model forms to satisfy these 
statutory obligations in 2013 (2013 TILA-RESPA Rule).\153\ The 
requirements and forms generally apply to closed-end consumer credit 
transactions secured by real property or a cooperative unit, other than 
a reverse mortgage subject to Sec.  1026.33.\154\
---------------------------------------------------------------------------

    \152\ CFPA sections 1098 & 1100A, codified at 12 U.S.C. 2603(a) 
& 15 U.S.C. 1604(b), respectively.
    \153\ See 78 FR 80225 (Dec. 31, 2013); 80 FR 43911 (July 24, 
2015). The TILA-RESPA integrated disclosure requirements have been 
amended several times. See https://www.consumerfinance.gov/rules-policy/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/.
    \154\ See Sec.  1026.19(e)(1) and (f)(1).
---------------------------------------------------------------------------

    The integrated disclosures consist of two forms: a Loan Estimate 
and a Closing Disclosure. The Loan Estimate provides the consumer with 
good faith estimates of credit costs and transaction terms. The Closing 
Disclosure is a final disclosure reflecting the actual terms of the 
transaction.
    As the CFPB explained in the 2013 TILA-RESPA Rule, the TILA-RESPA 
integrated disclosure forms are designed to make it easier for 
consumers to locate key cost information to help consumers decide 
whether they can afford the loan.\155\ The forms also provide 
information to compare different loan offers.\156\ The benefits of 
these forms are important for PACE borrowers just as they are for other 
mortgage borrowers.
---------------------------------------------------------------------------

    \155\ 78 FR 79730, 80225 (Dec. 31, 2013).
    \156\ Id.
---------------------------------------------------------------------------

    The CFPB has determined that certain elements of the current TILA-
RESPA integrated disclosures should be adapted so that the forms more 
effectively disclose information about PACE transactions. After 
proposing amendments and considering comments, the CFPB is finalizing 
the modifications to the Loan Estimate and Closing Disclosure described 
below. Where this final rule does not provide a PACE-specific version 
of a particular provision, the existing requirements in Sec. Sec.  
1026.37 and 1026.38 will apply. As with other mortgage transactions, 
elements of the forms that are not applicable for PACE transactions may 
generally be left blank.\157\
---------------------------------------------------------------------------

    \157\ See comments 37-1 & 38-1.
---------------------------------------------------------------------------

Requiring the Disclosures for PACE Transactions
    Many commenters supported implementation of the CFPB's proposed 
Loan Estimate and Closing Disclosure for PACE transactions, including 
consumer groups, mortgage industry trade associations, a credit union 
league, and a banking trade association. Several consumer groups and 
credit union leagues stated that TILA-RESPA integrated disclosure forms 
would provide consumers with detailed information about PACE 
transactions, which would improve transparency and consumers' ability 
to comparison shop. Several mortgage industry trade associations and 
consumer groups stated that TILA-RESPA integrated disclosure forms 
would improve the process through which PACE is marketed to consumers.
    Commenters raised a number of issues with the information that 
consumers currently receive during the marketing and origination 
process. For example, some stated that PACE transactions are often 
marketed through door-to-door solicitations and are sometimes 
accompanied by insufficient disclosures. Several mortgage industry 
trade associations and consumer groups stated that some PACE 
solicitations

[[Page 2453]]

include pressure to sign up and misrepresentations of various features 
of the PACE loan, including projected energy savings.
    Some commenters suggested that these problems can contribute to 
consumers' inability to afford a PACE loan. One consumer group 
indicated that inadequate disclosures and the lack of standardized TILA 
disclosure forms often lead to unexpected and unaffordable tax payment 
spikes, which may cause delinquency and late fees. Many commenters 
stated that requiring a Loan Estimate and Closing Disclosure for PACE 
transactions would alleviate these problems and improve consumers' 
experience during PACE originations.
    One government sponsor of PACE programs and one PACE company 
expressed concern regarding the cost of implementing the TILA-RESPA 
integrated disclosures, particularly because the Loan Estimate and 
Closing Disclosure have what the commenters stated are duplicative 
fields, and because the forms contain fields that are irrelevant for 
PACE transactions. The government sponsor and PACE company also 
asserted that requiring the TILA-RESPA integrated disclosures would be 
ill-advised because the CFPB did not test the proposed modifications. 
PACE companies and one PACE industry trade association asserted that 
the current PACE disclosure regime, which includes among other things 
disclosures and calls with the consumer to confirm their understanding 
of the transaction, is sufficient. Commenters also stated that TILA-
RESPA integrated disclosures are better suited to non-PACE mortgage 
transactions, which are larger than PACE transactions. One PACE company 
asserted that implementing TILA-RESPA integrated disclosure forms would 
be burdensome for financing transactions involving home improvement 
projects, which often involve change orders, because re-disclosure 
would be required for every change.
    In this final rule, the CFPB is requiring TILA-RESPA integrated 
disclosures for PACE loans, with modifications from the proposal as 
described below. The CFPB is also finalizing model forms in appendix H-
24(H) (Loan Estimate) and appendix H-25(K) (Closing Disclosure) and 
Spanish-language versions in appendix H-28(K) (Loan Estimate) and 
appendix H-28(L) (Closing Disclosure).
    The CFPB reiterates that the Loan Estimate and Closing Disclosure 
provide uniform mortgage disclosures that help consumers readily 
compare financing options, across financing products. Disclosures 
provided under State law or voluntarily by PACE companies, while 
potentially useful for consumers, would not be a substitute. Further, 
with respect to concerns that certain fields on the TILA-RESPA 
integrated disclosures would not pertain to PACE transactions, as with 
other mortgage transactions, fields that are irrelevant to particular 
PACE transactions may generally be left blank. With respect to the 
comment that the forms were not tested by the CFPB, the CFPB notes 
that, while the PACE-specific modifications were not tested, the 
current TILA-RESPA integrated disclosure forms, on which the PACE forms 
were based, were tested by the CFPB.
    With respect to the comment that TILA-RESPA integrated disclosure 
forms are particularly burdensome for PACE home improvement projects 
because change orders would require re-disclosure, the CFPB notes that 
many non-PACE home improvement loans, including those with change 
orders, use the TILA-RESPA integrated disclosure forms. Also, a revised 
Loan Estimate is not required for changes in the amounts of estimated 
charges for third-party services not required by the creditor; rather, 
that original estimated charge is in good faith under the rule so long 
as it was based on the best information reasonably available to the 
creditor at the time the disclosure was provided. Further, the TILA-
RESPA integrated disclosure requirements apply to disclosures made 
before or at consummation. The rule only requires re-disclosure post-
consummation in limited instances, primarily if an event in connection 
with the settlement occurs during the 30-calendar-day period after 
consummation and that event causes the Closing Disclosure to become 
inaccurate and results in a change to an amount paid by the consumer 
from what was previously disclosed.\158\
---------------------------------------------------------------------------

    \158\ See 12 CFR 1026.19(f)(2)(iii).
---------------------------------------------------------------------------

    The CFPB is implementing the disclosure requirements described in 
the section-by-section analyses of Sec. Sec.  1026.37(p) and 1026.38(u) 
pursuant to its authority under TILA section 105(a) and 105(f), and 
RESPA section 19(a). For the reasons discussed in the respective 
section-by-section analyses, the CFPB has determined that the 
implementation would be necessary and proper to carry out the purposes 
of TILA and RESPA. The provisions that implement the disclosure 
requirements under TILA section 105(a), including adjustments or 
exceptions discussed in the applicable section-by-section analyses, are 
intended to assure a meaningful disclosure of credit terms, avoid the 
uninformed use of credit, or facilitate compliance with TILA. In 
general, the changes are intended to make the Loan Estimate and Closing 
Disclosure more effective and understandable for PACE borrowers, and to 
facilitate compliance given the common features of PACE transactions. 
The CFPB has determined that the provisions that implement the 
disclosure requirements under RESPA section 19(a), including 
interpretations discussed in the applicable section-by-section 
analysis, further the purposes of RESPA and are consistent with the 
CFPB's authority under RESPA section 19(a).
    For the reasons discussed in the respective section-by-section 
analyses, the CFPB is finalizing various exemptions in Sec. Sec.  
1026.37(p) and 1026.38(u) pursuant to its authority under TILA section 
105(a) and 105(f). With respect to TILA section 105(a), the CFPB has 
determined that the exemptions are necessary and proper to carry out 
TILA's purposes, including by assuring the meaningful disclosure of 
credit terms and avoiding the uninformed use of credit. Additionally, 
with respect to TILA section 105(f), the CFPB's determination, after 
considering the factors in TILA section 105(f)(2), is that the 
disclosures exempted under this final rule would not provide meaningful 
benefit to consumers in the form of useful information or protection. 
In the CFPB's analysis, the exempted disclosure requirements would 
significantly complicate, hinder, or make more expensive credit for 
PACE transactions, and the exemptions do not undermine the goal of 
consumer protection. Where doing so would help assure the meaningful 
disclosure of credit terms and avoid the uninformed use of credit, the 
final rule replaces the exempted disclosures with disclosures that 
serve similar purposes to the existing disclosures, but that better fit 
the context of PACE transactions.
Specific Recommendations for Changes to Existing Forms
    Some commenters asserted that certain aspects of the existing Loan 
Estimates or Closing Disclosures could be confusing to consumers under 
the proposal. For example, a PACE company suggested that disclosure of 
loan purpose, required under Sec.  1026.37(a)(9) for the Loan Estimate 
and Sec.  1026.38(a)(5)(ii) for the Closing Disclosure, could be 
confusing to consumers. Consumer groups and a PACE company made similar 
assertions about the loan type, required under Sec.  1026.37(a)(11) for 
the Loan Estimate and Sec.  1026.38(a)(5)(iv) for the Closing

[[Page 2454]]

Disclosure. A PACE company stated that the information required under 
Sec.  1026.37(g)(3) pertaining to escrow costs should be removed, 
consistent with other aspects of the proposed form as explained below, 
in part to avoid consumer confusion. Two consumer groups made a similar 
point about the similar disclosure on the Closing Disclosure as 
discussed under Sec.  1026.38(u) below.
    The CFPB did not propose to amend these requirements and is not 
making changes in the final rule. The existing provisions are not 
likely to cause confusion. Additionally, with respect to the loan type 
and loan purpose disclosures, referring to PACE loans in a disclosure 
using mortgage terminology, such as disclosing the loan purpose as a 
``home equity loan,'' will not likely cause consumer confusion and 
instead will help reinforce that PACE loans are mortgages. The CFPB 
also expects that consumers are less likely to be confused by the 
escrow-related fields under Sec. Sec.  1026.37(g)(3) and 1026.38(g)(3) 
than fields referencing escrow payments elsewhere on the form because 
of their content and location on the form. To the extent that 
Sec. Sec.  1026.37(g)(3) or 1026.38(g)(3) do not apply to a particular 
transaction, creditors may leave the fields blank.
    The CFPB likewise is not adopting recommendations to remove 
references to PACE transactions as ``loans'' or to limit the length of 
the TILA-RESPA integrated disclosure forms, as PACE industry 
stakeholders suggested. The term ``loan'' accurately describes PACE 
transactions, so its use helps avoid the uninformed use of credit. And 
changing the length requirements for PACE forms would make them 
dissimilar to those used in non-PACE transactions, which would 
frustrate the purposes of TILA to assure meaningful disclosure of 
credit terms to enable consumers to compare more readily the various 
credit terms available and avoid the uninformed use of credit.
Waiting Period
    The CFPB is not amending the timing requirements for the Loan 
Estimate and Closing Disclosure for PACE transactions. The CFPB 
explained in the 2013 TILA-RESPA Rule that the seven-business-day 
waiting period between provision of the Loan Estimate and consummation 
is intended to effectuate the purposes of both TILA and RESPA by 
enabling the informed use of credit and ensuring effective advance 
disclosure of settlement charges.\159\ The CFPB explained that the 
three-business-day period following provision of the Closing Disclosure 
greatly enhances consumer awareness and understanding of the costs 
associated with the mortgage transaction.\160\ As explained in the 2013 
TILA-RESPA Rule, it is important for consumers to have a meaningful 
opportunity to shop for a mortgage loan, compare the different 
financing options available, and negotiate for favorable terms, and the 
waiting period should only be waived in the most stringent of 
circumstances.\161\
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    \159\ 78 FR 79730, 79802-03 (Dec. 31, 2013); see also id. at 
79806-07 (reasoning in context of considering amendments to bona 
fide personal financial emergencies that, at least with respect to 
relatively large mortgage loans, the seven-business-day waiting 
period would provide consumers a meaningful opportunity to shop for 
a loan, compare available financing options, and negotiate favorable 
terms, and that the seven-business-day waiting period ``is the 
minimum amount of time'' in which consumers could meaningfully do 
so).
    \160\ 78 FR 79730, 79847 (Dec. 31, 2013).
    \161\ Id. at 79806-07.
---------------------------------------------------------------------------

    Numerous consumer groups and mortgage industry trade associations 
expressed support for adopting the TILA-RESPA integrated disclosure 
timing requirements for PACE transactions. These commenters stated that 
the waiting periods will provide consumers time to review detailed 
information and make informed financial decisions. These commenters 
asserted that consumers often feel rushed through the origination 
process for PACE transactions because they are faced with door-to-door 
solicitations from contractors who pressure them to sign up quickly and 
do not provide adequate time to review applicable information. Several 
consumer groups stated that the mandatory waiting periods are necessary 
for consumers to consider the impact of the loan on future 
transactions. For example, these groups indicated that PACE 
transactions may affect a consumer's ability to refinance or sell their 
home in the future.
    Several home improvement contractors and one PACE trade association 
opposed imposing TILA-RESPA integrated disclosure timing requirements 
on PACE transactions. These commenters stated that the mandatory 
waiting periods would have adverse effects for PACE businesses as well 
as consumers. Specifically, these commenters asserted that PACE-related 
home improvements are often for emergency situations, and that the 
TILA-RESPA timing requirements would prevent PACE companies from 
starting work quickly, which would cause harm to consumers. Some 
commenters expressed concern that the mandatory waiting periods would 
impede PACE companies' ability to attract customers, particularly 
because they would impede the point-of-sale financing model that PACE 
customers prefer.
    Two PACE providers asserted that the mandatory waiting period 
should not apply to PACE loans because the mandatory timelines were 
created for non-PACE mortgages, many of which are larger transactions 
than PACE loans. One PACE company stated that waiting periods are not 
required for most financing transactions, including auto loans, which 
are usually costlier than PACE transactions. One PACE company stated 
that Regulation Z provides an exception to the timing requirements for 
loans secured by a timeshare interest, and that the regulation should 
similarly make exceptions for PACE loans because of similarities 
between the two types of obligations.
    One home improvement contractor and one PACE company commented 
that, because California law already provides a right to cancel for 
PACE transactions, the TILA-RESPA integrated disclosure waiting period 
is unnecessary. One PACE company stated that the waiting period is 
unnecessary because the FTC's Cooling-Off Rule gives consumers three 
days to cancel certain sales, including sales made at consumer's homes.
    As with the substantive disclosures, the waiting periods associated 
with the TILA-RESPA integrated disclosures will be important for PACE 
borrowers, particularly given concerns that the origination process for 
some PACE borrowers may not provide enough time to understand the 
obligation and shop for other financing options.\162\ As explained in 
part II.A, PACE loans are highly secure for investors even when 
consumers cannot afford to pay. This structure can affect incentives of 
originators, making it important for PACE consumers to have enough time 
to consider the uniform disclosures. Point-of-sale originations have 
long been a source of concern--many States require a cooling-off period 
before home improvement loans based on point-of-sale originations, and 
this precise concern was at the root of many of HOEPA's original 
purposes.\163\
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    \162\ See part II.A, supra.
    \163\ See To Protect Home Ownership and Equity through Enhanced 
Disclosure of the Risks Associated with Certain Mortgages: Hearings 
on The Home Ownership and Equity Protection Act of 1993, Hearing on 
S. 924 before the S. Comm. on Banking, Fin. & Urb. Affs., 103d Cong. 
(1993); The Home Equity Protection Act of 1993, Hearings on H.R. 
3153 before the Subcomm. on Consumer Credit & Ins. of the H. Comm. 
on Banking, Fin. & Urb. Affairs, 103d Cong. (1994); Reverse 
Redlining; Problems in Home Equity Lending, Hearings before the S. 
Comm. on Banking, Hous., & Urb. Affs., 103d Cong. (1993) (describing 
potential targeting of a widowed immigrant consumer by point-of-sale 
loan originators who ``came door to door trying to sell home 
improvements at an inflated price, on very severe credit terms''); 
see, e.g., Home Solicitation Sales Act of 1971, Cal. Civ. Code secs. 
1689.5-1689.13 (allows the buyer in almost any consumer transaction 
involving $25 or more, which takes place in the buyer's home or away 
from the seller's place of business, to cancel the transaction 
within three business days after signing the contract).

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[[Page 2455]]

    The CFPB notes that Regulation Z allows consumers to modify or 
waive applicable waiting periods if the consumer has a bona fide 
personal financial emergency.\164\ Some commenters stated that 
consumers may face emergency situations necessitating swifter 
originations--to the extent the emergency is a bona fide personal 
financial emergency, Regulation Z already provides an exception.
---------------------------------------------------------------------------

    \164\ 12 CFR 1026.19(e)(1)(v), (f)(1)(iv).
---------------------------------------------------------------------------

    With respect to the comment that the mandatory waiting periods are 
not appropriate for PACE loans because PACE loans are smaller than 
other mortgage loans, the CFPB notes that neither TILA nor Regulation Z 
impose different waiting periods for mortgage loans under a certain 
size. Indeed, the waiting periods under the current rule apply to home 
equity loans of a similar size to PACE transactions, many of which may 
not have the same structural risks as PACE transactions.
    As to the comment that waiting periods are not required for other 
types of transactions, such as auto loans, the CFPB notes that, unlike 
mortgage loans subject to the waiting period, auto lending is not 
secured by the consumer's real property. TILA explicitly requires 
waiting periods for credit secured by a dwelling.\165\ Congress 
specifically intended for transactions subject to the TILA-RESPA 
integrated disclosure rule to be subject to certain waiting periods.
---------------------------------------------------------------------------

    \165\ 15 U.S.C. 1638(b)(2)(A).
---------------------------------------------------------------------------

    Regarding the comment that the CFPB should provide for exceptions 
to the timing requirements for PACE loans because Regulation Z already 
does so for timeshare loans, the CFPB notes that PACE loans have 
structural risks as described above that waiting periods would directly 
address. Also, timeshare loans are secured only by the consumer's 
fractional interest in a timeshare unit, so the financial stakes, while 
significant, are somewhat lower. The CFPB also notes that TILA section 
128(b)(2)(G)(i)(1) specifically excludes timeshare plans from the 
statutory TILA-RESPA waiting period requirements but provides no 
similar exclusion for other types of credit secured by a dwelling.\166\
---------------------------------------------------------------------------

    \166\ See 15 U.S.C. 1638(b)(2)(G)(i)(1) (referring to ``a plan 
described in'' 11 U.S.C. 101(53D)).
---------------------------------------------------------------------------

    In response to the comments that the TILA-RESPA waiting period is 
unnecessary because State law or the FTC's Cooling-Off Rule already 
provides a right to cancel PACE loans, the CFPB notes that the waiting 
period applies to other home equity loans that involve door-to-door 
solicitation, and there is no reason to exempt PACE home improvement 
contractors in particular. Also, a waiting period and a right to cancel 
provide different consumer protections. The TILA-RESPA waiting period 
ensures that consumers have time to understand the obligation and shop 
before signing up, whereas rights to cancel or rescission rights apply 
after consummation. Additionally, the final rule will provide a 
nationwide baseline waiting period for PACE transactions under 
Regulation Z.
Section 1026.37 Content of Disclosures for Certain Mortgage 
Transactions (Loan Estimate)
1026.37(p) PACE Transactions
    Section 1026.37 implements the TILA-RESPA integrated disclosure 
requirements by setting forth the requirements for the Loan Estimate. 
Proposed Sec.  1026.37(p) sets forth modifications to the Loan Estimate 
requirements for ``PACE transactions,'' as defined under proposed Sec.  
1026.43(b)(15), to account for the unique nature of PACE. The CFPB is 
finalizing Sec.  1026.37(p) largely as proposed.
1026.37(p)(1) Itemization
    TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) are 
currently implemented in part by Sec.  1026.37(c)(1) through (5), which 
generally requires creditors to disclose a table itemizing each 
separate periodic payment or range of payments, among other 
information, under the heading ``Projected Payments.'' As part of the 
projected payments table, Sec.  1026.37(c)(2) requires the itemization 
of each separate periodic payment or range of payments disclosed on the 
periodic payments table. The CFPB is finalizing changes to certain of 
these requirements under Sec.  1026.37(p)(1)(i) and (ii) as explained 
below.
1026.37(p)(1)(i) Other Fees and Amounts
    Section 1026.37(c)(2)(ii) requires the disclosure of the maximum 
amount payable for mortgage insurance premiums corresponding to the 
principal and interest payment disclosed on the projected payments 
table, labeled ``Mortgage Insurance.''
    Two consumer groups, a PACE company, and a government sponsor of 
PACE programs suggested that the field for ``Mortgage Insurance'' that 
currently appears in the projected payments table does not fit because 
PACE transactions do not carry mortgage insurance. The consumer groups 
also suggested adding a field titled ``Annual Administrative Fee'' to 
capture a fee that consumers must often pay that would not be 
considered part of their principal or interest payment.
    The CFPB is adding Sec.  1026.37(p)(1)(i) to ensure the projected 
payments table accurately discloses payment information relevant to the 
PACE transaction. Section 1026.37(p)(1)(i) removes the mortgage 
insurance field from the projected payments table for PACE transactions 
because that field is not applicable to PACE transactions as some 
commenters asserted--the CFPB is unaware of any PACE transactions that 
carry mortgage insurance. In place of the mortgage insurance field, 
Sec.  1026.37(p)(1)(i) requires the disclosure of ``Fees and Other 
Amounts,'' which includes the maximum amount payable for any fees or 
other amounts corresponding to the periodic payment for the PACE 
transaction that are not disclosed as part of the principal and 
interest disclosure under Sec.  1026.37(c)(2)(i). Section 
1026.37(p)(1)(i) requires that the amount disclosed under the ``Fees 
and Other Amounts'' field be included in the calculation of the total 
periodic payment under Sec.  1026.37(c)(2)(iv) in place of the amount 
disclosed for mortgage insurance under Sec.  1026.37(c)(2)(ii).
1026.37(p)(1)(ii) Escrow
    As part of the projected payments table, the creditor is required 
to state the total periodic payment under Sec.  1026.37(c)(2)(iv), as 
well as the constituent parts of the total periodic payment under Sec.  
1026.37(c)(2)(i) through (iii). Relevant here, Sec.  1026.37(c)(2)(iii) 
generally requires a field for the disclosure of the amount payable 
into an escrow account to pay for some or all mortgage-related 
obligations, as applicable, labeled ``Escrow,'' together with a 
statement that the amount disclosed can increase over time. The CFPB 
proposed to exempt PACE transactions from the escrow account payment 
disclosure requirements under Sec.  1026.37(c)(2)(iii).
    As discussed in the analysis of Sec.  1026.35(b)(2)(i)(E), the CFPB 
is unaware of any PACE transactions that

[[Page 2456]]

carry their own escrow accounts. Thus, absent an exemption, the escrow 
account payment field under Sec.  1026.37(c)(2)(iii) would have 
generally been disclosed as ``0'' if this field were included on the 
Loan Estimate associated with any PACE transaction.\167\ This entry 
would likely cause confusion for PACE borrowers who pay their property 
taxes into pre-existing escrow accounts associated with non-PACE 
mortgage loans, since PACE transactions are typically part of the 
property tax payment. It also would likely create doubt for the 
consumer about whether the PACE transaction will be repaid through the 
existing escrow account. The exemption in this final rule will mitigate 
this risk.
---------------------------------------------------------------------------

    \167\ See existing comment 37(c)(2)(iii)-1.
---------------------------------------------------------------------------

    The CFPB did not receive any comments and is finalizing proposed 
Sec.  1026.37(p)(1), renumbered as Sec.  1026.37(p)(1)(ii), to 
accommodate the addition of Sec.  1026.37(p)(1)(i), as described above.
1026.37(p)(2) Taxes, Insurance, and Assessments
    TILA sections 128(a)(16) and 128(b)(4)(A) are currently implemented 
in part by Sec.  1026.37(c)(4)(ii). Section 1026.37(c)(4) requires 
creditors to include in the projected payments table \168\ information 
about taxes, insurance, and assessments, with the label ``Taxes, 
Insurance & Assessments.'' Section 1026.37(c)(4)(ii) generally requires 
disclosure of the sum of mortgage-related obligations, including 
property taxes, insurance premiums, and other charges.\169\ Section 
1026.37(c)(4)(iii) through (vi) requires various statements about this 
disclosure. Under Sec.  1026.37(p)(2)(i) and (ii), the CFPB proposed to 
retain most of these requirements for PACE transactions, with changes 
to the disclosures currently required under Sec.  1026.37(c)(4)(iv), 
(v), and (vi) for PACE transactions.
---------------------------------------------------------------------------

    \168\ As noted in the section-by-section analysis of Sec.  
1026.37(p)(1), Sec.  1026.37(c) generally requires creditors to 
disclose a table itemizing each separate periodic payment or range 
of payments, among other information, under the heading ``Projected 
Payments.''
    \169\ Section 1026.37(c)(4)(ii) requires disclosure of ``[t]he 
sum of the charges identified in Sec.  1026.43(b)(8), other than 
amounts identified in Sec.  1026.4(b)(5), expressed as a monthly 
amount, even if no escrow account for the payment of some or any of 
such charges will be established.'' Section 1026.43(b)(8) defines 
mortgage-related obligations as ``property taxes; premiums and 
similar charges identified in Sec.  1026.4(b)(5), (7), (8), and (10) 
that are required by the creditor; fees and special assessments 
imposed by a condominium, cooperative, or homeowners association; 
ground rent; and leasehold payments.'' See also the section-by-
section analysis of Sec.  1026.37(p)(7)(i) for discussion of the 
applicable unit-period for PACE transactions.
---------------------------------------------------------------------------

    Currently, Sec.  1026.37(c)(4)(iv) requires a statement of whether 
the sum of mortgage-related obligations disclosed pursuant to Sec.  
1026.37(c)(4)(ii) includes payments for property taxes, certain 
insurance premiums, or other charges.\170\ The CFPB proposed Sec.  
1026.37(p)(2)(i) to provide specificity as to the PACE payment. The 
CFPB proposed to require a statement of whether the amount disclosed 
pursuant to Sec.  1026.37(c)(4)(ii) includes payments for the PACE 
transaction and, separately, whether it includes payments for the non-
PACE portions of the property tax payment. The CFPB proposed to require 
the statement about the PACE loan payment to be labeled ``PACE 
Payment,'' and the statement about the other property taxes ``Property 
Taxes (not including PACE loan).'' The proposed changes were intended 
to help consumers understand that the PACE transaction will increase 
the consumer's property tax payment.
---------------------------------------------------------------------------

    \170\ Section 1026.37(c)(4)(iv) refers to ``payments for 
property taxes, amounts identified in Sec.  1026.4(b)(8), and other 
amounts described in'' Sec.  1026.37(c)(4)(ii). Section 
1026.4(b)(8), in turn, refers to ``[p]remiums or other charges for 
insurance against loss of or damage to property, or against 
liability arising out of ownership or use of property, written in 
connection with a credit transaction.'' Additionally, the CFPB notes 
that a creditor issuing a simultaneous loan that is a PACE 
transaction would generally be required to include the simultaneous 
PACE loan in calculating the sum of taxes, assessments, and 
insurance described in Sec.  1026.37(c)(4)(ii), since the 
simultaneous PACE loan would increase the consumer's property tax 
payment. This is consistent with existing comment 19(e)(1)(i)-1, 
which cross-references existing Sec.  1026.17(c)(2)(i) and generally 
provides that creditors must make TILA-RESPA integrated disclosures 
based on the best information reasonably available to the creditor 
at the time the disclosure is provided to the consumer. As discussed 
in the section-by-section analysis of Sec.  1026.43(c)(2)(iv), the 
CFPB is also clarifying in this final rule that a creditor 
originating a PACE transaction knows or has reason to know of 
simultaneous loans that are PACE transactions if the transactions 
are included in any existing database or registry of PACE 
transactions that includes the geographic area in which the property 
is located and to which the creditor has access.
---------------------------------------------------------------------------

    Section 1026.37(c)(4)(iv) also currently requires creditors to 
state whether the constituent parts of the taxes, insurance, or 
assessments will be paid by the creditor using escrow account funds. 
The CFPB proposed under Sec.  1026.37(p)(2)(i) to eliminate this 
requirement for PACE transactions. The CFPB reasoned in the proposal 
that omitting this information would avoid potential consumer confusion 
for similar reasons as explained in the discussion of proposed Sec.  
1026.37(p)(1).
    The CFPB also proposed amendments to the requirements in Sec.  
1026.37(c)(4)(v) and (vi). Currently, Sec.  1026.37(c)(4)(v) requires a 
statement that the consumer must pay separately any amounts described 
in Sec.  1026.37(c)(4)(ii) that are not paid by the creditor using 
escrow account funds; and Sec.  1026.37(c)(4)(vi) requires a reference 
to escrow account information, required under Sec.  1026.37(g)(3), 
located elsewhere on the Loan Estimate. The CFPB proposed to replace 
these disclosures with the following for PACE transactions: (1) a 
statement that the PACE transaction, described in plain language as a 
``PACE loan,'' will be part of the property tax payment; and (2) a 
statement directing the consumer, if the consumer has a pre-existing 
mortgage with an escrow account, to contact the consumer's mortgage 
servicer for what the consumer will owe and when. The proposed 
disclosures were intended to promote consumer understanding of PACE 
transactions and their effect on any pre-existing mortgage loans, and 
that omitting the two existing disclosures would not impair consumer 
understanding of the transaction.
    One credit union league supported requiring the disclosure of PACE 
loans separately from other property tax obligations among the 
disclosure of estimated taxes, insurance, and assessments under 
proposed Sec.  1026.37(p)(2)(i). The commenter stated that homeowners 
would benefit from this requirement and, more generally, from 
clarification of the implications of the PACE transaction on property 
taxes.
    Two consumer groups also suggested adjusting the qualitative 
disclosures proposed under Sec.  1026.37(p)(2)(ii). They recommended 
including a statement that the PACE loan would increase the consumer's 
monthly escrow payment by a certain specific amount, as well as a 
prompt for the consumer to notify their mortgage servicer of the change 
and request a short-year escrow account analysis so that the escrow 
amount can be adjusted to account for the change.
    The CFPB is finalizing the proposed changes to Sec.  
1026.37(p)(2)(i) and (ii) with modifications. As finalized, section 
Sec.  1026.37(p)(i) contains a small change for precision. Section 
1026.37(p)(2)(ii) requires, in addition to the proposed disclosure, a 
statement that, if the consumer has a pre-existing mortgage with an 
escrow account, the PACE loan will increase the consumer's escrow 
payment. The CFPB agrees with consumer group commenters that an 
explicit disclosure of the impact of the PACE loan on the consumer's 
escrow payment will be useful for consumers. However, the 
recommendation to include a prompt for the consumer to notify their 
mortgage servicer of the change and to request an escrow

[[Page 2457]]

account analysis could be confusing or too technical to be useful for 
some consumers.
1026.37(p)(3) Contact Information
    TILA section 128(a)(1) is currently implemented in part by Sec.  
1026.37(k), which requires disclosure of certain contact information, 
under the heading ``Additional Information About this Loan.'' \171\ In 
general, a creditor must disclose: (1) the name and NMLSR ID,\172\ 
license number, or other unique identifier issued by the applicable 
jurisdiction or regulating body for the creditor, labeled ``Lender,'' 
and mortgage broker, labeled ``Mortgage Broker,'' if any; (2) similar 
information for the individual loan officer, labeled ``Loan Officer,'' 
of the creditor and the mortgage broker, if any, who is the primary 
contact for the consumer; and (3) the email address and telephone 
number of the loan officer. Section 1026.37(k)(1) through (3) further 
provides that, in the event the creditor, mortgage broker, or loan 
officer has not been assigned an NMLSR ID, the license number or other 
unique identifier issued by the applicable jurisdiction or regulating 
body with which the creditor or mortgage broker is licensed and/or 
registered shall be disclosed, with the abbreviation for the State of 
the applicable jurisdiction or regulating body.
---------------------------------------------------------------------------

    \171\ Section 1026.37(k) also integrates the disclosure of 
certain information required under appendix C to Regulation X.
    \172\ Under Sec.  1026.37(k)(1), the NMLS ID refers to the 
Nationwide Mortgage Licensing System and Registry identification 
number.
---------------------------------------------------------------------------

    The CFPB proposed to additionally require similar disclosures for 
PACE companies if such information was not disclosed under the 
requirements described above. Specifically, under Sec.  1026.37(p)(3), 
the CFPB proposed to require disclosure of the PACE company's name, 
NMLSR ID (labeled ``NMLS ID/License ID''), email address, and telephone 
number of the PACE company (labeled ``PACE Company,'' a term defined 
under Sec.  1026.37(b)(14)). The CFPB proposed, similar to Sec.  
1026.37(k)(1) through (3)'s existing requirements with respect to 
creditors, mortgage brokers, and loan officers, that, in the event that 
the PACE company has not been assigned an NMLSR ID, the creditor must 
disclose on the Loan Estimate the license number or other unique 
identifier issued by the applicable jurisdiction or regulating body 
with which the PACE company is licensed and/or registered, along with 
the abbreviation for the State of the applicable jurisdiction or 
regulatory body stated before the word ``License'' in the label, if 
any. The CFPB proposed commentary to clarify that these disclosures 
would not be required under the proposal if the PACE company's contact 
information was otherwise disclosed pursuant to Sec.  1026.37(k)(1) 
through (3). As proposed in comment 37(p)(3)-1, for example, if the 
PACE company is a mortgage broker as defined in Sec.  1026.36(a)(2), 
then the PACE company is disclosed as a mortgage broker and the field 
for PACE company may be left blank.
    Two consumer groups recommended mandating disclosure of the contact 
information and State license number for the home improvement 
contractor involved in the PACE transaction, stating that it would help 
consumers spot potential fraud by the home improvement company, 
especially if the PACE company lists a home improvement company that is 
different from the home improvement company with which the consumer has 
been dealing.
    Two consumer groups, a State agency, and one credit union league 
agreed with the CFPB's proposed addition of a ``PACE Company'' field 
for disclosure of license and contact information for the PACE company. 
These consumer groups and a PACE government sponsor also addressed the 
proposal to include PACE companies under the ``Mortgage Broker'' 
heading when applicable. Some consumer groups asserted that PACE 
companies are not perceived as mortgage brokers and engage in many 
activities that go beyond the services of a mortgage broker. To avoid 
consumer confusion, the consumer groups suggested requiring the company 
to fill in the ``PACE Company'' fields in all cases, as well as 
``Mortgage Broker'' fields if the company also serves as a mortgage 
broker. The government sponsor suggested that the Loan Estimate make 
reference to PACE Company instead of mortgage broker because in 
practice, the two serve different functions.
    The CFPB is finalizing proposed Sec.  1026.37(p)(3) with an 
adjustment. The CFPB agrees with commenters that the PACE Company's 
contact information should be disclosed under the PACE Company field 
for each PACE transaction and is finalizing this requirement, 
regardless of whether such information is also disclosed under the 
mortgage broker field. This approach will help provide clarity for 
consumers. To accommodate this change, the CFPB is not finalizing 
proposed comment 37(p)(3)-1.
    As explained in the 2013 TILA-RESPA Rule, disclosing the name and 
NMLSR ID number, if any, for the creditor, mortgage broker, and loan 
officers employed by such entities provides consumers with the 
information they need to conduct the due diligence as to whether these 
parties are appropriately licensed.\173\ Having this information may 
also help consumers assess the risks associated with services and 
service providers associated with the transaction, which in turn serves 
the purposes of TILA, RESPA, and the CFPA.\174\ Similar considerations 
apply to the disclosure of the PACE company.
---------------------------------------------------------------------------

    \173\ 78 FR 79730, 79975-76 (Dec. 31, 2013).
    \174\ See id.
---------------------------------------------------------------------------

    The CFPB declines the suggestion to include fields for the home 
improvement contractor's information. Some home equity loans used to 
finance home improvement projects are marketed by contractors, similar 
to PACE transactions. Home improvement contractor contact information 
is not required for those non-PACE home equity loans, and this final 
rule will maintain consistency with respect to PACE transactions.
1026.37(p)(4) Assumption
    TILA section 128(a)(13) is currently implemented in part by Sec.  
1026.37(m)(2), which requires the creditor to disclose a statement of 
whether a subsequent purchaser of the property may be permitted to 
assume the remaining loan obligation on its original terms, labeled 
``Assumption.'' This existing disclosure requirement could be 
misleading for PACE transactions. In general, PACE payment obligations 
can transfer with the sale of the property, such that the subsequent 
property owner would be required to pay the remaining obligation as a 
function of property ownership. However, the new homeowners generally 
do not technically assume the loans.
    The CFPB proposed to require a statement reflecting a PACE-specific 
risk that stakeholders have indicated sometimes occurs when consumers 
try to transfer the PACE obligation by selling the property. The CFPB 
proposed for the statement to state that, if the consumer sells the 
property, the buyer or the buyer's mortgage lender may require the 
consumer to pay off the PACE transaction as a condition of the sale. 
The CFPB proposed to require the creditor to label this disclosure 
``Selling the Property'' and use the term ``PACE loan'' in the 
disclosure. The intent was to further the purposes of TILA by providing 
useful information about key risks of PACE loans, thus avoiding the 
uninformed use of credit.

[[Page 2458]]

    A number of mortgage industry trade associations, a credit union 
trade association, and consumer groups supported the proposed 
disclosure. Some stated that it would convey useful information or 
counter misinformation about whether PACE loans can be assumed. 
Consumer groups and a mortgage trade association suggested also 
requiring information pertaining to the PACE loan's potential effect on 
a consumer's ability to refinance their non-PACE mortgage. For example, 
a mortgage trade association suggested adding language notifying the 
consumer that they may not be able to sell the home if they do not have 
enough equity after paying off various loans, including the PACE loan. 
Consumer groups and a mortgage trade association suggested adding a 
disclosure that the PACE loan may negatively affect the consumer's 
ability to refinance a pre-existing non-PACE mortgage.
    After reviewing the comments, the CFPB is finalizing the disclosure 
as proposed. Although additional information pertaining to the effect 
of a PACE loan on a consumer's ability to refinance their non-PACE 
mortgage or sell their home could be helpful to consumers, the CFPB 
concludes that such information is not necessary given the new 
disclosure requiring a statement that if the consumer sells the 
property, the buyer or the buyer's mortgage lender may require the 
consumer to pay off the PACE transaction as a condition of the sale.
1026.37(p)(5) Late Payment
    TILA section 128(a)(10) is currently implemented in part by Sec.  
1026.37(m)(4), which requires the creditor to disclose a statement 
detailing any charge that may be imposed for a late payment. Unlike 
non-PACE mortgage loans, however, late payment charges for PACE 
transactions are typically determined by taxing authorities as part of 
the overall property tax payment. It may be challenging to disclose all 
late charges that may be associated with a property tax delinquency 
succinctly and effectively on the Loan Estimate, either under existing 
Sec.  1026.37(m)(4) or otherwise. The CFPB understands that some States 
impose several types of late charges, some of which can change as the 
delinquency persists or depend on factors that are unknown at the time 
of the disclosure.
    To avoid potential confusion for consumers and ensure the Loan 
Estimate includes useful information about the charges a PACE borrower 
might accrue in delinquency, the CFPB proposed to implement TILA 
section 128(a)(10) for PACE transactions by requiring the disclosure in 
proposed Sec.  1026.37(p)(5) rather than the existing disclosure in 
Sec.  1026.37(m)(4). The CFPB proposed to require creditors to include 
one or more statements relating to late charges, as applicable. First, 
under Sec.  1026.37(p)(5)(i), the CFPB proposed a statement detailing 
any charge specific to the PACE transaction that may be imposed for a 
late payment, stated as a dollar amount or percentage charge of the 
late payment amount, and the number of days that a payment must be late 
to trigger the late payment fee, labeled ``Late Payment.'' The CFPB 
proposed to clarify under comment 37(p)(5)-1 that a charge is specific 
to the PACE transaction if the property tax collector does not impose 
the same charges for general property tax delinquencies. Although the 
CFPB is not aware of PACE transactions that impose such PACE-specific 
late charges, if any PACE transactions do provide for it, disclosure of 
late payment information would be incomplete without it. If a PACE 
transaction does not provide for late charges, the disclosure would not 
have been required under the proposal.
    Second, under Sec.  1026.37(p)(5)(ii), the CFPB proposed to 
require, for any charge that is not specific to the transaction, either 
(1) a statement notifying the consumer that, if the consumer's property 
tax payment is late, they may be subject to penalties and late fees 
established by their property tax collector, as well as a statement 
directing the consumer to contact the tax collector for more 
information; or (2) a statement describing any charges that may result 
from property tax delinquency that are not specific to the PACE 
transaction, which may include dollar amounts or percentage charges and 
the number of days a payment must be late to trigger the fee. The CFPB 
proposed these requirements to provide flexibility for the creditor 
while ensuring that the Loan Estimate contains useful information about 
charges that may result from a property tax delinquency.
    A credit union trade association suggested in a comment that the 
CFPB also require a disclosure of the risk of foreclosure or tax sale. 
Two consumer groups expressed support for proposed Sec.  
1026.37(p)(5)(i) but recommended against finalizing Sec.  
1026.37(p)(5)(ii). They asserted that creditors should be required to 
provide specific information about the potential charges and penalties 
for untimely payment, as the fees and penalties for late property tax 
payments are clearly established and well-known to PACE creditors and 
the information would improve consumer understanding before 
consummation.
    The CFPB is finalizing Sec.  1026.37(p)(5) and associated 
commentary as proposed. The additional disclosures recommended by 
commenters may be difficult for PACE providers to disclose in a manner 
that is useful to consumers and may be unknowable at the time of 
disclosure in certain circumstances, including in jurisdictions where 
charges associated with late payment that are not specific to the PACE 
transactions may not be known at the time of the disclosure.
1026.37(p)(6) Servicing
    RESPA section 6(a) is currently implemented by Sec.  1026.37(m)(6), 
which requires the creditor to disclose a statement of whether the 
creditor intends to service the loan or transfer the loan to another 
servicer, using the label ``Servicing.'' PACE transactions are not 
subject to transfer of servicing rights as far as the CFPB is aware. 
Thus, the CFPB proposed to implement RESPA section 6(a) for PACE 
transactions by requiring a servicing-related disclosure that would be 
more valuable for PACE borrowers.
    The CFPB proposed to require the PACE creditor to provide a 
statement that the consumer will pay the PACE transaction, using the 
term ``PACE loan,'' as part of the consumer's property tax payment. The 
CFPB proposed to require a statement directing the consumer, if the 
consumer has a mortgage escrow account that includes the consumer's 
property tax payment, to contact the consumer's mortgage servicer for 
what the consumer will owe and when. The CFPB proposed to preserve the 
label ``Servicing'' for the disclosure.
    Two consumer groups stated that PACE loans are not subject to 
transfer of servicing rights. These groups and one mortgage trade 
association suggested that the CFPB add more language to the disclosure 
about how consumers may make their PACE payments through a mortgage 
escrow account or directly to the tax authority. The mortgage trade 
association also suggested requiring disclosure of other potential 
legal and contractual implications, including the possibility of 
technical default on a pre-existing mortgage loan as a consequence of 
the PACE loan, or consequences of failing to pay the PACE loan in a 
timely fashion.
    After considering the comments, the CFPB is finalizing Sec.  
1026.37(p)(6) as proposed, with one change--the phrase ``mortgage 
escrow account'' will be changed to ``mortgage with an escrow account'' 
for readability and clarity.

[[Page 2459]]

Requiring the disclosure in Sec.  1026.37(p)(6) will promote the 
informed use of credit. The additional disclosures that commenters 
recommended are too attenuated from the central purpose of the 
disclosure in Sec.  1026.37(p)(6), which is to convey information about 
the servicing of the PACE loan. Certain suggestions would also be too 
vague or technical to be useful for consumers.
1026.37(p)(7) Exceptions
1026.37(p)(7)(i) Unit-Period
    Because PACE transaction payments are repaid with the property 
taxes once or twice a year, the applicable unit-period disclosed on the 
Loan Estimate would typically be annual or semi-annual. The CFPB 
proposed for the model form for PACE under proposed appendix H-24(H) to 
use ``annual'' in the tables disclosing loan terms and projected 
payments. The CFPB proposed under Sec.  1026.37(p)(7)(i) that, wherever 
the proposed form uses ``annual'' to describe the frequency of any 
payments or the applicable unit-period, the creditor shall use the 
appropriate term to reflect the transaction's terms, such as semi-
annual payments. This is similar to existing Sec.  1026.37(o)(5), which 
permits unit-period changes wherever the Loan Estimate or Sec.  1026.37 
uses ``monthly'' to describe the frequency of any payments or uses 
``month'' to describe the applicable unit-period.\175\
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    \175\ Comment 37(o)(5)-4 explains that, for purposes of Sec.  
1026.37, the term ``unit-period'' has the same meaning as in 
appendix J to Regulation Z.
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    Two consumer groups supported the CFPB's proposal. The CFPB did not 
receive any other comments regarding this part of the proposal. The 
CFPB is finalizing Sec.  1026.37(p)(7)(i) as proposed.
1026.37(p)(7)(ii) PACE Nomenclature
    The CFPB understands that PACE companies may market PACE loans to 
consumers using brand names that do not include the term ``Property 
Assessed Clean Energy'' or the acronym ``PACE.'' To improve the Loan 
Estimate's usefulness for consumers, the CFPB proposed Sec.  
1026.37(p)(7)(ii) to clarify that, wherever Sec.  1026.37 requires 
disclosure of the term ``PACE'' or the proposed model form in appendix 
H-24(H) uses the term ``PACE,'' the creditor may substitute the name of 
a specific PACE financing program that will be recognizable to the 
consumer. The CFPB proposed comment 37(p)(7)(ii)-1 to provide an 
example of how a creditor may substitute the name of a specific PACE 
financing program that is recognizable to the consumer as PACE on the 
form.
    The CFPB received comments from two consumer groups supporting the 
proposal but suggesting that the CFPB clarify in regulatory text or 
commentary that the nomenclature change is only available if it will be 
used consistently throughout the marketing materials and financing 
documents, and that the creditor must otherwise use the phrase ``PACE 
loan.'' One mortgage industry trade association suggested requiring 
that the creditor add ``(a covered PACE-type financing program)'' after 
the branded name.
    The CFPB is finalizing Sec.  1026.37(p)(7)(ii) as proposed and 
comment 37(p)(7)(ii)-1 with one change from the proposal. In addition 
to providing an example of how a creditor may substitute the name of a 
specific PACE financing program that is recognizable to the consumer, 
the comment as finalized clarifies that the name of a specific PACE 
financing program will not be recognizable to the consumer unless it is 
used consistently in financing documents for the PACE transaction and 
any marketing materials provided to the consumer. This will increase 
the likelihood that the Loan Estimate identifies the name of a specific 
PACE financing program that is recognizable to the consumer.
Section 1026.38 Content of Disclosures for Certain Mortgage 
Transactions (Closing Disclosure)
1026.38(u) PACE Transactions
    Section 1026.38 implements the TILA-RESPA integrated disclosure 
requirements by setting forth the requirements for the Closing 
Disclosure. Proposed Sec.  1026.38(u) set forth modifications to the 
Closing Disclosure requirements under Sec.  1026.38 for ``PACE 
transactions,'' as defined under Sec.  1026.43(b)(15), to account for 
the unique nature of PACE. The CFPB is finalizing Sec.  1026.38(u) 
largely as proposed.
1026.38(u)(1) Transaction Information
    TILA section 128(a)(1) is currently implemented in part by Sec.  
1026.38(a)(4), which requires disclosure of identifying information for 
the borrower, the seller, where applicable, and the lender,\176\ under 
the heading ``Transaction Information.'' \177\ The CFPB proposed Sec.  
1026.38(u)(1) to additionally require the Closing Disclosure for a PACE 
transaction to include the name of any PACE company involved in the 
transaction, labeled ``PACE Company.'' Proposed Sec.  1026.38(u)(1) 
referred to proposed Sec.  1026.43(b)(14) for the definition of ``PACE 
company'' for these purposes: a person, other than a natural person or 
a government unit, that administers the program through which a 
consumer applies for or obtains PACE financing.
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    \176\ For purposes of Sec.  1026.38(a)(4)(iii), the lender is 
defined as ``the name of the creditor making the disclosure.'' In 
relevant part, the ``creditor'' is a ``person who regularly extends 
consumer credit that is subject to a finance charge or is payable by 
written agreement in more than four installments (not including a 
down payment), and to whom the obligation is initially payable.'' 
See Sec.  1026.2(a)(17). As noted in the discussion of Sec.  
1026.2(a)(14), government sponsors are typically the creditors for 
PACE transactions.
    \177\ Section 1026.38(a)(4) also integrates the disclosure of 
certain information required under appendix A to Regulation X.
---------------------------------------------------------------------------

    Two consumer groups supported requiring the PACE company's 
identifying information under ``Transaction Information.''
    The CFPB is finalizing Sec.  1026.38(u)(1) as proposed. As the CFPB 
explained in the 2013 TILA-RESPA Rule, disclosing the identifying 
information for the borrower, seller, and lender promotes the informed 
use of credit.\178\ Disclosing the PACE company's identifying 
information will do the same.\179\
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    \178\ 78 FR 79730, 80002-03 (Dec. 31, 2013).
    \179\ See part II.A for discussion of the central role PACE 
companies often play in PACE transactions.
---------------------------------------------------------------------------

1026.38(u)(2) Projected Payments
    TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) is currently 
implemented in part by Sec.  1026.38(c). Under Sec.  1026.38(c)(1), the 
Closing Disclosure must disclose the information in the projected 
payments table required on the Loan Estimate under Sec.  1026.37(c)(1)-
(4),\180\ with certain exceptions. These disclosures generally include 
the total periodic payment, as well as an itemization of the periodic 
payment's constituent parts. Additionally, Sec.  1026.38(c)(2) requires 
the projected payments table on the Closing Disclosure to include a 
statement referring the consumer to a detailed disclosure of escrow 
account information located elsewhere on the form.
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    \180\ Section 1026.37(c)(1)-(3) requires information about the 
initial periodic payment or range of payments, and Sec.  
1026.37(c)(4) requires information about estimated taxes, insurance, 
and assessments. The CFPB is finalizing changes to these disclosure 
requirements for PACE transactions as described in the section-by-
section analysis of Sec.  1026.37(p)(1) and (2).
---------------------------------------------------------------------------

    Under Sec.  1026.38(u)(2), the CFPB proposed changes to the 
projected payments table for the Closing Disclosure in a PACE 
transaction to mirror the changes to the projected payments table on 
the Loan Estimate under Sec.  1026.37(p)(1) and (2). The CFPB proposed 
these changes for the same

[[Page 2460]]

reasons as set forth in the discussion of Sec.  1026.37(p)(1) and (2) 
above.
    For the reasons set forth in the discussion of Sec.  1026.37(p)(1) 
and (2), the CFPB is adopting Sec.  1026.38(u)(2) as proposed, to state 
that the creditor shall disclose the projected payments information 
required by Sec.  1026.38(c)(1) as modified by Sec.  1026.37(p)(1) and 
(2). The final rule also removes from the Closing Disclosure projected 
payments table a reference to escrow-related information located 
elsewhere on the form. The CFPB is exempting the escrow-related 
information under Sec.  1026.38(u)(6).
1026.38(u)(3) Assumption
    For the reasons discussed in the section-by-section analysis of 
proposed Sec.  1026.37(p)(4), proposed Sec.  1026.38(u)(3) would have 
implemented TILA section 128(a)(13) for PACE transactions by requiring 
the creditor to use the subheading ``Selling the Property,'' instead of 
``Assumption,'' and to disclose the information required by Sec.  
1026.37(p)(4) in place of the information required under Sec.  
1026.38(l)(1).
    Comments received related to the assumption disclosure are 
discussed in the section-by-section analysis of Sec.  1026.37(p)(4). 
The CFPB is adopting Sec.  1026.38(u)(3) as proposed for the reasons 
discussed under Sec.  1026.37(p)(4).
1026.38(u)(4) Late Payment
    The CFPB proposed that the ``Late Payment'' disclosure on the 
Closing Disclosure for PACE transactions only include late payment 
charges specific to the PACE transaction and not charges imposed by the 
State or locality for late payment of taxes. This proposed change 
parallels the changes to the Loan Estimate, described in the section-
by-section analysis of Sec.  1026.37(p)(5).
    Comments received related to the Late Payment disclosure are 
discussed in the section-by-section analysis of Sec.  1026.37(p)(5). 
The CFPB is adopting Sec.  1026.38(u)(4) as proposed for the reasons 
discussed under Sec.  1026.37(p)(5).
1026.38(u)(5) Partial Payment Policy
    TILA section 129C(h) is currently implemented by Sec.  
1026.38(l)(5), which requires certain disclosures regarding the 
lender's acceptance of partial payments under the subheading ``Partial 
Payments.'' Section 1026.38(l)(5)(i) through (iii) generally requires 
disclosure of whether the creditor accepts partial payments and, if so, 
whether the creditor may apply the partial payments or hold them in a 
separate account. Section 1026.38(l)(5)(iv) requires a statement that, 
if the loan is sold, the new lender may have a different policy.
    For PACE transactions, however, the current partial payment 
disclosure may not accurately and effectively reflect partial payment 
options. In general, partial payment policies for PACE transactions are 
typically set by the taxing authority and not by the creditor. The tax 
collector may offer payment options not described accurately in the 
disclosure required under Sec.  1026.38(l)(5), and any payment options 
would likely apply to the full property tax payment, not only to the 
PACE payment specifically. Further, if a PACE borrower pays their 
property taxes into an escrow account on a pre-existing mortgage loan, 
their PACE loans may be subject to a partial payment policy associated 
with the pre-existing mortgage loan, which the disclosure of partial 
payment policies associated with the creditor for the PACE transaction 
would not necessarily reflect.
    The CFPB proposed to require under Sec.  1026.38(u)(5) that, in 
lieu of the information required by Sec.  1026.38(l)(5), the creditor 
shall disclose a statement directing the consumer to contact the 
mortgage servicer about the partial payment policy for the account if 
the consumer has a mortgage escrow account for property taxes, and to 
contact the tax collector about the tax collector's partial payment 
policy if the consumer pays property taxes directly to the tax 
authority. The CFPB is finalizing Sec.  1026.38(u)(5) as proposed to 
avoid potential inaccuracies that might arise under existing 
requirements and provide the consumer with useful information as it 
relates to a PACE transaction.
    Two consumer groups stated that the disclosure should provide more 
information than proposed, such as a statement that consumers will need 
to make adjustments to their budgets to pay the increased property 
payment and a statement indicating whether State or local law prohibits 
partial payments for tax payments.
    The CFPB is not adopting this recommendation. PACE consumers are 
best served with a statement directing the consumer to contact the 
mortgage servicer or tax collector for the partial payment policy 
pertaining to their particular circumstance. Certain of the commenters' 
recommended additions are not closely related to information about 
partial payments, and other suggested disclosures could be misleading 
or not useful for PACE consumers.
1026.38(u)(6) Escrow Account
    TILA section 129D(h) and 129D(j) is currently implemented in part 
by Sec.  1026.38(l)(7), which requires a statement of whether an escrow 
account will be established for the transaction, as well as detailed 
information about the effects of having or not having an escrow 
account, under the subheading ``Escrow Account.'' For similar reasons 
as discussed in the section-by-section analysis for Sec.  1026.37(p)(1) 
with respect to exempting escrow-related information from the projected 
payments table on the Loan Estimate for PACE transactions, and because 
certain elements of the disclosure under Sec.  1026.38(l)(7) could be 
inaccurate for some PACE borrowers, the CFPB proposed Sec.  
1026.38(u)(6) to exempt creditors in PACE transactions from the 
requirement to disclose on the Closing Disclosure the information 
otherwise required under Sec.  1026.38(l)(7).
    Two consumer groups supported specifically addressing to the 
proposed exemption of the Escrow Account disclosure under Sec.  
1026.38(u)(6). The CFPB is finalizing Sec.  1026.38(u)(6) as proposed.
1026.38(u)(7) Liability After Foreclosure or Tax Sale
    TILA section 129C(g)(2) and 129C(g)(3) is currently implemented in 
part by Sec.  1026.38(p)(3), which requires the creditor to disclose 
certain information about the consumer's potential liability after 
foreclosure. It requires, under the subheading ``Liability after 
Foreclosure,'' a brief statement of whether, and the conditions under 
which, the consumer may remain responsible for any deficiency after 
foreclosure under applicable State law, a brief statement that certain 
protections may be lost if the consumer refinances or incurs additional 
debt on the property, and a statement that the consumer should consult 
an attorney for additional information.
    In general, this disclosure provides useful information for 
consumers who may have State-law protections against deficiency. 
However, it may not be applicable in the same way, or at all, with 
respect to PACE transactions due to their unique nature. Thus, the CFPB 
proposed under Sec.  1026.38(u)(7) to provide that the creditor shall 
not disclose the liability-after-foreclosure disclosure described in 
Sec.  1026.38(p)(3).\181\ The CFPB proposed

[[Page 2461]]

that, if the consumer may be responsible for any deficiency after 
foreclosure or tax sale under applicable State law, the creditor shall 
instead disclose a brief statement that the consumer may have such 
responsibility, a description of any applicable protections provided 
under State anti-deficiency laws, and a statement that the consumer 
should consult an attorney for additional information. The CFPB 
proposed to require the subheading ``Liability after Foreclosure or Tax 
Sale.'' This proposed information was intended to be more useful for 
PACE borrowers than the existing disclosure required under Sec.  
1026.38(p)(3), thus helping to avoid the uninformed use of credit.
---------------------------------------------------------------------------

    \181\ As described in Sec.  1026.37(m)(7), if the purpose of the 
credit transaction is to refinance an extension of credit as 
described in Sec.  1026.37(a)(9)(ii), the Loan Estimate would be 
required to disclose information about the consumer's liability 
after foreclosure. The CFPB understands that this disclosure is 
unlikely to be required on a Loan Estimate for a PACE loan. 
Therefore, the final rule does not address such language on the Loan 
Estimate.
---------------------------------------------------------------------------

    Two consumer groups supported the proposal to require the 
disclosure only if the consumer may be responsible for deficiency under 
State law but noted that tax foreclosure is not likely to result in a 
deficiency even if State law permits the liability.
    The CFPB finalizes proposed Sec.  1026.38(u)(7) with modifications. 
As finalized, Sec.  1026.38(u)(7) requires that, if the consumer may be 
responsible for any deficiency after foreclosure or tax sale under 
applicable State law, the creditor shall disclose a brief statement 
that, if the property is sold through foreclosure or tax sale and the 
sale does not cover the amount owed on the PACE obligation, the 
consumer may be liable for some portion of the unpaid balance under 
State law, and a statement that the consumer may want to consult an 
attorney for additional information. This information will be disclosed 
under the subheading ``Liability after Foreclosure or Tax Sale.'' The 
CFPB is not finalizing the proposed requirement for the creditor to 
disclose a description of any applicable protections provided under 
State anti-deficiency laws. Consumers will be better served with a 
statement to consult an attorney to understand any applicable State 
protections rather than relying on a description from the creditor.
1026.38(u)(8) Contact Information
    TILA section 128(a)(1) is currently implemented in part by Sec.  
1026.38(r), which generally requires certain information to be 
disclosed in a separate table, under the heading ``Contact 
Information.'' \182\ For transactions without a seller, Sec.  
1026.38(r) requires specified contact and licensing information for 
each creditor, mortgage broker, and settlement agent participating in 
the transaction. The CFPB proposed Sec.  1026.38(u)(8) to require the 
same contact and licensing information for the PACE company if not 
otherwise disclosed pursuant to Sec.  1026.38(r). As discussed in the 
section-by-section analysis of Sec.  1026.37(p)(3), the PACE company 
may be a mortgage broker, in which case its information would be 
required under the existing requirements in Sec.  1026.38(r); the CFPB 
proposed under Sec.  1026.38(u)(8) not to require the disclosure of the 
PACE company a second time. As explained in the section-by-section 
analysis of Sec.  1026.43(b)(14), given the important role that PACE 
companies play in PACE transactions, disclosing their contact 
information will be useful to consumers and will facilitate the 
informed use of credit.
---------------------------------------------------------------------------

    \182\ Section 1026.38(r) also integrates the disclosure of 
certain information required under appendix A and appendix C to 
Regulation X.
---------------------------------------------------------------------------

    Comments received relating to the substance of proposed Sec.  
1026.38(u)(8) are discussed in the section-by-section analysis of Sec.  
1026.37(p)(3). As discussed under Sec.  1026.37(p)(3), the CFPB agrees 
with commenters that the PACE company's contact information should be 
disclosed under the PACE Company field on the Closing Disclosure for 
each PACE transaction and is finalizing this requirement.
1026.38(u)(9) Exceptions
1026.38(u)(i) Unit-Period
    To permit creditors the flexibility to disclose the correct unit-
period for each PACE transaction, the CFPB proposed under Sec.  
1026.38(u)(9)(i) that, wherever proposed form H-25(K) of appendix H 
uses ``annual'' to describe the frequency of any payments or the 
applicable unit-period, the creditor shall use the appropriate term to 
reflect the transaction's terms, such as semi-annual payments. The 
Closing Disclosure changes in proposed Sec.  1026.38(u)(9)(i) would 
have paralleled the Loan Estimate changes in proposed Sec.  
1026.37(p)(7)(i), and the CFPB proposed Sec.  1026.38(u)(9)(i) for the 
same reasons stated in the section-by-section analysis of Sec.  
1026.37(p)(7)(i). Proposed Sec.  1026.38(u)(9)(i) was similar to 
existing Sec.  1026.38(t)(5)(i), which permits changes wherever the 
Closing Disclosure or Sec.  1026.38 uses ``monthly'' to describe the 
frequency of any payments or uses ``month'' to describe the applicable 
unit-period.'' \183\
---------------------------------------------------------------------------

    \183\ Comment 38(t)(5)-3 explains that, for purposes of Sec.  
1026.38, the term ``unit-period'' has the same meaning as in 
appendix J to Regulation Z.
---------------------------------------------------------------------------

    Comments received related to unit-period are discussed in the 
section-by-section analysis of Sec.  1026.37(p)(7)(i). The CFPB is 
finalizing Sec.  1026.38(u)(9)(i) as proposed for the reasons discussed 
under Sec.  1026.37(p)(7)(i).
1026.38(u)(9)(ii) PACE Nomenclature
    The CFPB is finalizing Sec.  1026.38(u)(9)(ii)(A) and (B) relating 
to certain terms used on the Closing Disclosure for PACE transactions.
    The CFPB proposed Sec.  1026.38(u)(9)(ii) to clarify that, wherever 
Sec.  1026.38 requires disclosure of the term ``PACE'' or the proposed 
model form in appendix H-25(K) uses the term ``PACE,'' the creditor may 
substitute the name of a specific PACE financing program that will be 
recognizable to the consumer. The CFPB proposed in comment 
38(u)(9)(ii)-1 an example of how a creditor may substitute the name of 
a specific PACE financing program that is recognizable to the consumer 
as PACE on the form. Comments received related to proposed Sec.  
1026.38(u)(9)(ii) are discussed in the section-by-section analysis of 
Sec.  1026.37(p)(7)(ii). The CFPB is finalizing the proposal, 
renumbered as Sec.  1026.38(u)(9)(ii)(A) and comment 38(u)(9)(ii)(A)-1, 
subject to the modification discussed in the section-by-section 
analysis of Sec.  1026.37(p)(7)(ii). As modified, comment 
38(u)(9)(ii)(A)-1 clarifies that the name of a specific PACE financing 
program will not be recognizable to the consumer unless it is used 
consistently in financing documents for the PACE transaction and any 
marketing materials provided to the consumer.
    The CFPB is also adding Sec.  1026.38(u)(9)(ii)(B), which requires 
creditors of PACE transactions to use the term ``PACE contract 
documents'' on the Closing Disclosure to refer to the appropriate loan 
document and security instrument required to be disclosed under Sec.  
1026.38(p)(2). This terminology will improve the precision of this 
disclosure for PACE transactions, as suggested in comments.
1026.41 Periodic Statements
1026.41(e) Exemptions
1026.41(e)(7) PACE Transactions
    TILA section 128(f) generally requires periodic statements for 
residential mortgage loans.\184\ Section 1026.41 implements this 
requirement by requiring creditors, servicers, or assignees, as 
applicable, to provide a statement for each billing cycle that contains 
information such as the amount due, past payment breakdown,

[[Page 2462]]

transaction activity, contact information, and delinquency 
information.\185\ The CFPB proposed to exempt PACE transactions from 
this periodic statement requirement. After considering the comments, 
the CFPB is finalizing the proposed exemption for the reasons discussed 
in this section.
---------------------------------------------------------------------------

    \184\ 15 U.S.C. 1638(f).
    \185\ For purposes of Sec.  1026.41, the term ``servicer'' 
includes the creditor, assignee, or servicer of the loan, as 
applicable. 12 CFR 1026.41(a)(2).
---------------------------------------------------------------------------

    Several commenters addressed the proposed exemption. A government 
sponsor of PACE programs expressed support for the exemption. A State 
agency did not object to the exemption, noting that many consumers with 
PACE loans would already have mortgages, and that PACE transactions 
would often be for relatively small dollar amounts.
    Two consumer groups and a credit union trade association opposed 
exempting PACE transactions from the periodic statement requirement in 
Sec.  1026.41. These commenters recommended requiring simplified 
periodic statement disclosures that would provide consumers with 
information that would enable them to track loan performance, verify 
correct payment application, and monitor whether the loans incur 
improper fees. The consumer groups stated that consumers currently lack 
such information. They stated that simplified periodic statements would 
not be confusing for consumers despite the intermingling of PACE 
payments and property tax payments, and that any possible confusion 
could be addressed through explanatory text on the statements. Consumer 
group commenters also stated that providing periodic statements would 
not create undue burden, as local tax collectors and authorities 
already provide payment reports and other information to PACE creditors 
or their contractors that could be used to prepare an annual statement.
    The consumer groups and credit union trade association also 
recommended adjusting the Regulation Z timing requirements for their 
suggested simplified PACE periodic statements. The credit union trade 
association suggested requiring such statements either annually or tied 
to particular intervals in the loan term. The consumer groups suggested 
requiring an annual statement.
    Providing simplified information on periodic statements and 
including explanatory text as some commenters suggested could help 
mitigate to some degree the risk of consumer confusion as to the 
content of the forms but would not address risks associated with 
receiving two sets of disclosures. Were periodic statement requirements 
applied to PACE transactions, consumers would receive two separate 
notices about overlapping but different obligations, likely provided by 
different parties, both containing information about the PACE loan: The 
local taxing authority would provide a property tax bill, and 
Regulation Z would require the creditor, servicer, or assignee to 
provide periodic statements.\186\ This risks consumer confusion--for 
example, about whether fields in the periodic statement include details 
of the PACE financing, property taxes, or both, or why the figures in 
the periodic statement do not align with those in their property tax 
statements. This could also cause consumers to ignore information from 
the separate disclosures given that some of the content would have 
similar subject matter.
---------------------------------------------------------------------------

    \186\ See 12 CFR 1026.41(a)(2).
---------------------------------------------------------------------------

    Adjusting the timing requirements for provision of periodic 
statements for PACE loans, as some commenters suggested, would not 
adequately resolve these concerns. The CFPB acknowledges, as some 
commenters asserted, that, in certain circumstances, the parties who 
would be responsible for providing periodic statements may already have 
access to some of the information needed to fill out the periodic 
statements, including information about loan performance and 
delinquency. However, even in such circumstances, that responsible 
parties have such access would not resolve the other concerns 
supporting the exemption from TILA and Regulation Z's periodic 
statement requirement at Sec.  1026.41 or mean that a periodic 
statement requirement would not impose a meaningful burden.
    Even with the exemption in Sec.  1026.41(e)(7), consumers will 
still have access to some of the information commenters recommended 
requiring in a simplified periodic statement. For example, consumers 
will receive information regarding payments and delinquency from their 
property tax collectors and mortgage servicers if the consumers have a 
mortgage with an escrow account, as well as other entities such as 
third-party assessment administrators. Consumers will also be able to 
obtain information about the PACE loan by requesting payoff statements 
pursuant to Sec.  1026.36(c)(3). Although the CFPB recognizes, as 
consumer group commenters noted, that these sources of information do 
not contain as much information as periodic statements and some will 
not be provided on a regular cadence, they do provide at least some 
information to help the consumer track the PACE loan. The CFPB will 
continue to monitor the market for consumer harm.
    In addition to proposing an exemption from the periodic statement 
requirement under Sec.  1026.41, the CFPB requested comment on whether 
the final rule should address any other mortgage servicing requirements 
in Regulation Z or Regulation X. A trade association for State housing 
agencies requested that the CFPB ensure that having a PACE loan does 
not prohibit a consumer with a federally backed mortgage loan from 
having access to the same loss mitigation options available to 
consumers without PACE loans. Regulation X, 12 CFR 1024.41, generally 
sets forth requirements governing the loss mitigation application 
process. The owner or assignee of the borrower's mortgage loan 
determines the availability of, or eligibility requirements for, loss 
mitigation options such as loan modifications, short sales, or deeds-
in-lieu of foreclosure.\187\ The CFPB is not adjusting that framework 
in this final rule. The final rule is also not addressing any servicing 
requirements that apply only to ``servicers'' as defined in Regulation 
X, as there does not appear to be a ``servicer'' in typical PACE 
transactions.\188\
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    \187\ See generally Regulation X, 12 CFR 1024.41 (setting forth 
loss mitigation procedures); see also comment 41(c)(1)-2 (explaining 
that the regulatory term ``loss mitigation options available to a 
borrower'' refers to ``those options offered by an owner or assignee 
of the borrower's mortgage loan'').
    \188\ See PACE NPRM, 88 FR 30388, 30405 (explaining that there 
does not appear to be a ``servicer'' as defined in Regulation X in 
PACE transactions where the local government taxing authority--a 
governmental entity--receives the consumer's regular PACE payments 
as part of the consumer's larger property tax payment).
---------------------------------------------------------------------------

    The CFPB finalizes the exemption of PACE transactions from the 
periodic statement requirement under Sec.  1026.41(e)(7) using its 
authority under TILA section 105(a) and (f) and Dodd-Frank Act section 
1405(b). The CFPB concludes that this exemption is necessary and proper 
under TILA section 105(a), for the reasons stated above, to effectuate 
TILA's purposes and to facilitate compliance with its requirements. 
Furthermore, the CFPB concludes, for the reasons stated above, that 
disclosure of the information specified in TILA section 128(f)(1) would 
not provide a meaningful benefit to PACE consumers, considering the 
factors in TILA section 105(f). This conclusion would be true 
regardless of the loan amount, borrower status (including related 
financial arrangements, financial sophistication,

[[Page 2463]]

and the importance to the borrower of the loan), or whether the loan is 
secured by the consumer's principal residence. Consequently, the 
exemption will further the consumer protection objectives of the 
statute, and help to avoid complicating, hindering, or making more 
expensive the credit process. It is in the interest of consumers and in 
the public interest, consistent with Dodd-Frank Act section 1405(b).
1026.43 Minimum Standards for Transactions Secured by a Dwelling
    Section 1026.43 implements the requirement in TILA section 129C(a) 
that creditors must make a reasonable, good faith determination of a 
consumer's ability to repay a residential mortgage loan and defines the 
loans eligible to be ``qualified mortgages,'' which obtain certain 
presumptions of compliance pursuant to TILA section 129C(b). The 
purpose of TILA section 129C is to assure that consumers are offered 
and receive residential mortgage loans on terms that reasonably reflect 
their ability to repay the loans. As discussed below, the CFPB proposed 
and is finalizing a number of amendments to Sec.  1026.43 and its 
commentary to apply the ability-to-repay requirements to PACE 
transactions with certain PACE-specific adjustments. The comments the 
CFPB received are discussed below. The CFPB is finalizing the 
amendments to Sec.  1026.43 as proposed.
1026.43(b) Definitions
    Section 1026.43(b) sets forth certain definitions for purposes of 
Sec.  1026.43. The CFPB is finalizing as proposed new definitions for 
the terms PACE company and PACE transaction in Sec.  1026.43(b)(14) and 
(b)(15) \189\ and an amendment to the commentary to Sec.  1026.43(b)(8) 
regarding the definition of mortgage-related obligations.
---------------------------------------------------------------------------

    \189\ Rather than add these definitions into Sec.  1026.43(b) 
where they would fall alphabetically in the paragraph, the final 
rule maintains the numbering for these definitions from the 
proposal.
---------------------------------------------------------------------------

1026.43(b)(8) Mortgage-Related Obligations
    Section 1026.43(b)(8) defines ``mortgage-related obligations'' to 
include property taxes, among other things. In turn, Sec.  
1026.43(c)(2)(v) requires a creditor to consider the consumer's monthly 
payment for mortgage-related obligations in making the repayment 
ability determination required under Sec.  1026.43(c)(1). The CFPB 
proposed to amend comment 43(b)(8)-2 to explicitly state that any 
payments for pre-existing PACE transactions are considered property 
taxes for purposes of Sec.  1026.43(b)(8). The CFPB is finalizing as 
proposed the amendment to comment 43(b)(8)-2. This amendment clarifies 
that a creditor must consider payments for pre-existing PACE 
transactions as mortgage-related obligations when determining the 
consumer's repayment ability.
    Two consumer groups supported the proposed amendment to comment 
43(b)(8)-2, stating that it would eliminate doubt as to whether 
payments on pre-existing PACE transactions should be included in a 
creditor's ability-to-repay determination under Sec.  1026.43(c). The 
commenters suggested clarifying in comment 43(b)(8)-2 that a creditor 
that knows or has reason to know that a consumer has an existing PACE 
transaction does not comply with the requirement to consider the 
consumer's monthly payment for mortgage-related obligations under Sec.  
1026.43(c)(2)(v) by relying on information provided by a governmental 
organization if the information provided does not reflect the PACE 
transaction. The commenters stated that such a change would remind 
creditors of the need to diligently search for existing PACE loans on 
the property when conducting an ability-to-repay determination under 
Sec.  1026.43(c).
    The CFPB declines to make the suggested changes to comment 
43(b)(8)-2. As discussed below, the CFPB is clarifying in comment 
43(c)(3)-5 that a creditor that knows or has reason to know that a 
consumer has an existing PACE transaction does not comply with Sec.  
1026.43(c)(2)(v) by relying on information provided by a governmental 
organization, either directly or indirectly, if the information 
provided does not reflect the PACE transaction. Further, existing 
commentary to the definition of mortgage-related obligations contains a 
cross-reference to creditors' obligations to take into account any 
mortgage-related obligations under Sec.  1026.43(c)(2)(v) for purposes 
of determining a consumer's ability to repay.\190\
---------------------------------------------------------------------------

    \190\ See comment 43(b)(8)-1 (referencing the commentary to 
Sec.  1026.43(c)(2)(v)).
---------------------------------------------------------------------------

1026.43(b)(14) PACE Company
    The CFPB proposed to add a definition of ``PACE company'' in Sec.  
1026.43(b)(14) to provide clarity and for ease of reference. The CFPB 
is adopting Sec.  1026.43(b)(14) and comment 43(b)(14)-1 as proposed. 
Section 1026.43(b)(14) provides that PACE company means a person, other 
than a natural person or a government unit, that administers the 
program through which a consumer applies for or obtains a PACE 
transaction. Comment 43(b)(14)-1 provides that indicia of whether a 
person administers a PACE financing program for purposes of Sec.  
1026.43(b)(14) include, for example, marketing PACE financing to 
consumers, developing or implementing policies and procedures for the 
origination process, being substantially involved in making a credit 
decision, or extending an offer to the consumer.
    The PACE company definition applies to the private companies 
involved in running the PACE programs. As discussed in part II.A, most 
local governments that engage in PACE financing rely on private 
companies to administer PACE programs through, for example, marketing 
PACE financing to consumers, administering originations, making 
decisions about whether to extend the loan, and enlisting home 
improvement contractors to help facilitate the originations and 
implement the home improvement projects.
    Various commenters, including consumer groups and trade 
associations, supported the adoption of the proposed definition of PACE 
company. In general, they expressed that the proposed definition 
adequately captures the entities involved in administering a PACE 
financing program.
    One consumer group suggested that the CFPB should expand the 
definition to include contractors, subcontractors, and others acting on 
behalf of the PACE provider or contractors acting as agents of the PACE 
company. They stated that this would improve enforcement and help avoid 
evasion of TILA, as it would make the PACE companies accountable for 
the contractors or subcontractors. A State agency suggested that the 
CFPB amend the proposed definition of PACE company to include natural 
persons in the business of solicitation for sales or services 
associated with or reasonably contemplated to be financed by PACE 
loans.
    A government sponsor of PACE financing stated that the CFPB should 
clarify the term ``government unit'' contained in the definition of a 
PACE company. The commenter stated that, under the proposed definition, 
it would not be clear whether certain State entities involved in PACE 
programs would be considered a government unit excluded from being a 
PACE company.
    Two consumer groups supporting the proposal suggested that the CFPB 
include additional examples of what it means to administer a PACE 
program, such as, for example, accepting and processing loan 
applications and processing and finalizing the issuance of

[[Page 2464]]

contractual assessments. They stated that doing so would help prevent 
possible evasion efforts that could occur if the rule lacks sufficient 
specificity as to what it means to administer a PACE program.
    The CFPB concludes that the proposed definition of ``PACE company'' 
effectively describes the intended entities and accounts for the unique 
nature of PACE financing. The CFPB is not adopting commenters' 
recommendations to expand the proposed definition to include natural 
persons or entities acting as agents of the PACE company. As described 
in Sec.  1026.43(i), PACE companies that are substantially involved in 
making a credit decision will be subject to the ability-to-repay 
requirements and civil liability for violations thereof. The CFPB 
understands that home improvement contractors in the PACE context 
perform generally the same functions as in other forms of home 
improvement loans associated with door-to-door sales. The CFPB 
therefore declines to create a separate liability provision for home 
improvement contractors in the PACE context. The CFPB notes that the 
term ``government unit'' is already used in TILA and Regulation Z, 
including as part of the definition of person.\191\ The CFPB declines 
to define the term ``government unit'' in this rulemaking. The CFPB 
also declines to add to comment 43(b)(14)-1 examples suggested by some 
commenters because such indicia would expand the definition to cover 
entities not substantially involved in making the credit decision. 
Parties who merely accept applications, for example, do not administer 
these programs in a way that would warrant coverage or liability for 
the ability-to-repay requirements described in Sec.  1026.43.
---------------------------------------------------------------------------

    \191\ See, e.g., 12 CFR 1026.2(a)(22).
---------------------------------------------------------------------------

1026.43(b)(15) PACE Transaction
    The CFPB proposed to add a definition for the term ``PACE 
transaction'' to Regulation Z that uses the language of the EGRRCPA 
section 307 definition of PACE financing.\192\ The CFPB is adopting as 
proposed the definition of ``PACE transaction'' in Sec.  
1026.43(b)(15). Section 1026.43(b)(15) provides that a PACE transaction 
means financing to cover the costs of home improvements that results in 
a tax assessment on the real property of the consumer. This term is 
used in adjustments or exemptions the CFPB is finalizing in Sec. Sec.  
1026.35, 1026.37, 1026.38, 1026.41, and 1026.43 as well as appendix H 
to part 1026.
---------------------------------------------------------------------------

    \192\ See 15 U.S.C. 1639c(b)(3)(C)(i).
---------------------------------------------------------------------------

    Various commenters, including consumer groups, trade associations, 
and State agencies, supported the adoption of the proposed definition 
of PACE transaction. These commenters said the proposed definition was 
clear and accurately captured the nature of PACE transactions.
    Several other commenters addressed what the definition should 
cover. For example, a PACE government sponsor suggested that the 
definition should include financing to cover the costs of qualifying 
improvements that result in a tax assessment on the real property 
improved by the consumer, stating that PACE improvements may include 
projects other than those customarily thought of as home improvements, 
including installation of generators, heat pumps, and solar arrays. 
Similarly, two consumer groups stated that the PACE transaction 
definition should also cover qualifying improvements under State law 
and local governmental authority resulting in a tax assessment on the 
real property of the consumer. They noted that some States have 
expanded PACE programs to include qualifying work extending beyond the 
structure of a building, such as certain fire hardening measures or the 
building of a sea wall. In addition, a PACE company suggested that the 
CFPB limit the definition of PACE transaction to cover only financing 
secured by a lien that takes priority over a pre-existing first-lien 
mortgage on the subject property and exclude from coverage PACE 
transactions secured by subordinate liens.
    The CFPB finalizes the definition of PACE transaction as proposed, 
which uses the language of the EGRRCPA section 307 definition of PACE 
financing. The definition covers financing for improvements to 
residential property, including improvements to the land on which the 
structure sits. This definition of PACE transaction also accords with 
other CFPB regulations governing the home mortgage market.\193\
---------------------------------------------------------------------------

    \193\ See, e.g., 12 CFR 1003 comment 2(i)-2 (commentary to 
Regulation C definition of ``home improvement loan'' stating that 
such loans ``include improvements both to a dwelling and to the real 
property on which the dwelling is located . . . .'').
---------------------------------------------------------------------------

    The CFPB declines to carve out transactions secured by subordinate 
liens, as suggested by one commenter. EGRRCPA section 307 directs the 
CFPB to prescribe regulations for ``PACE financing,'' defined as 
voluntary financing to cover the costs of home improvements that 
results in a tax assessment on the real property of the consumer; it 
does not distinguish among transactions based on lien status.
1026.43(c) Repayment Ability
    The existing ability-to-repay requirement in Sec.  1026.43(c)(1) 
requires a creditor to make a reasonable and good faith determination 
of a consumer's ability to repay at or before consummation of a covered 
mortgage loan. Section 1026.43(c)(2) provides eight factors that a 
creditor must consider in making the repayment ability determination, 
while Sec.  1026.43(c)(3) and (c)(4) generally requires a creditor to 
verify the information that the creditor relies on in determining a 
consumer's repayment ability using reasonably reliable third-party 
records. For the reasons explained in the proposal, the CFPB proposed 
to apply existing Sec.  1026.43(c) to PACE transactions, with 
adjustments to the commentary to Sec.  1026.43(c) and the addition of 
the provisions set out in Sec.  1026.43(i). As discussed below, the 
CFPB concludes that the existing ability-to-repay framework set out in 
Sec.  1026.43(c) effectively carries out the purposes of TILA's 
ability-to-repay provisions and is generally appropriate for PACE 
transactions, with adjustments to the commentary to Sec.  1026.43(c) 
and the addition of Sec.  1026.43(i).\194\ For the reasons discussed 
below, the CFPB is finalizing the amendments to the commentary to Sec.  
1026.43(c) and new Sec.  1026.43(i) as proposed.
---------------------------------------------------------------------------

    \194\ See 15 U.S.C. 1639c(b)(3)(C)(ii) (directing the CFPB to 
prescribe regulations that carry out the purposes of TILA's ability-
to-repay provisions for residential mortgage loans with respect to 
PACE transactions).
---------------------------------------------------------------------------

    Many commenters, including consumer groups, banking and credit 
union trade groups, and a State agency, supported the application of 
the existing ability-to-repay framework to PACE transactions. These 
commenters discussed the protections that the ability-to-repay 
framework would afford to consumers in light of the structure and risks 
of PACE financing, as well as the past perceived abuses in the PACE 
industry. For example, a consumer group asserted that requiring a 
creditor to conduct an ability-to-repay determination for a PACE 
transaction would protect borrowers from potential predatory lending 
practices that could heighten foreclosure risk. A different consumer 
group stated that home equity lending is not a strong indicator of a 
consumer's ability to pay, and that the ability-to-repay requirements 
can better align project costs with the consumer's household finances. 
Consumer groups also asserted that TILA's ability-to-repay

[[Page 2465]]

requirements would increase access to more sustainable financing.
    One mortgage industry trade association stated that adopting 
ability-to-repay requirements for PACE lending would be consistent with 
the treatment of other mortgage financing. A credit union trade 
association suggested that the ability-to-repay requirements would help 
reduce risk to consumers and the financial system that may follow from 
expedited originations. One State agency encouraged the CFPB to apply 
ability-to-repay requirements to PACE transactions, so long as such 
requirements are not inconsistent with requirements under California's 
ability-to-pay regime for PACE transactions.\195\
---------------------------------------------------------------------------

    \195\ See 10 Cal. Code Regs sec. 1620.01 et seq.
---------------------------------------------------------------------------

    Several commenters supporting the proposal to adopt TILA's ability-
to-repay framework for PACE loans specifically addressed verification 
requirements. Consumer groups favored the application of income 
verification requirements in TILA to PACE transactions. Two stated that 
weakening these verification requirements or other ability-to-repay 
requirements would ignore both evidence and the CFPB's own data 
suggesting abuses.
    Many PACE companies and PACE industry stakeholders, as well as a 
home improvement contractor, opposed the proposed application of TILA's 
ability-to-repay standards to PACE transactions. Several of these 
commenters, including two PACE companies and a home improvement 
contractor, pointed to the success of State laws in Florida and 
California in regulating industry practices. These commenters stated 
that, even if the CFPB imposes Federal ability-to-repay standards to 
PACE transactions, it should exempt transactions that are subject to a 
State-level ability-to-repay regime. A government sponsor of PACE 
programs asserted that the proposed ability-to-repay requirements would 
likely decrease PACE lending by as much as 50 percent.
    Multiple PACE companies and a PACE industry trade association 
asserted that the proposal did not adequately account for the unique 
nature of PACE financing. Several PACE companies asserted that the 
proposed requirements would not be appropriate given current industry 
practices and low delinquency rates on PACE loans. For example, one 
PACE company stated that employment verification was unnecessary given 
its current underwriting practices, which include verifying that 
applicants have managed their mortgage and property tax payments. One 
PACE company stated that the proposed ability-to-repay rules were 
modeled on stringent requirements applicable to purchase-money mortgage 
loans that are significantly larger than PACE loans. Another PACE 
company suggested tailoring the ability-to-repay requirements to make 
them less stringent in light of the fact that PACE loans are smaller 
and have smaller margins than other mortgage debt.
    PACE companies also recommended that the CFPB account for a variety 
of other factors in finalizing ability-to-repay requirements, including 
concerns about economic costs to homeowners and the environment, the 
need for access to credit for consumers in need of swift financing, and 
characteristics of PACE transactions including that they are 
nonrecourse, no-acceleration, and have fixed interest rates.
    Commenters diverged on the question of whether a creditor 
undertaking an ability-to-repay determination for a PACE transaction 
should be permitted to consider potential energy savings that would 
result from the home improvements financed by the PACE loan. A 
government sponsor suggested that the CFPB should permit, but not 
require, the consideration of potential energy savings in an ability-
to-repay determination. A number of consumer groups as well as 
mortgage-industry trade associations encouraged the CFPB not to permit 
a creditor to consider potential energy savings, asserting that such 
savings are speculative and may not ultimately materialize.
    After considering the comments received, the CFPB is finalizing the 
proposal to apply existing Sec.  1026.43(c) to PACE transactions. It is 
also finalizing as proposed the adjustments to the commentary to Sec.  
1026.43(c) and new Sec.  1026.43(i), as described in more detail below. 
These aspects of the final rule implement the directive of EGRRCPA 
section 307 that the CFPB prescribe regulations that carry out the 
purposes of TILA section 129C(a) for residential mortgage loans with 
respect to PACE transactions. As explained in the proposal, the 
existing ability-to-repay framework will provide PACE creditors 
sufficient operational flexibility while still requiring compliance 
with the general requirement to make a reasonable and good faith 
determination at or before consummation that the consumer will have a 
reasonable ability to repay the loan according to its terms. This final 
rule adopts the existing statutory and regulatory regime governing 
residential mortgage loans, with adjustments to account for the unique 
nature of PACE financing.
    The CFPB declines to exempt PACE transactions that are covered by 
State laws requiring an assessment of consumers' repayment ability as 
some commenters suggested. A uniform Federal standard is necessary to 
implement EGRRCPA section 307, which specifically directed the CFPB to 
prescribe regulations to carry out the purposes of TILA's ability-to-
repay requirements for PACE loans. Although some States currently have 
protections in place that may resemble TILA's ability-to-repay rules in 
some ways, not all States with PACE-enabling legislation have such 
requirements, and no State requirements fully reflect the Federal 
requirements as implemented by this final rule. This rule will ensure 
that consumers have as a baseline the protections of TILA's ability-to-
repay requirements. This is consistent with TILA's treatment of other 
closed-end mortgage credit and the mandate of EGRRCPA section 307. As 
discussed in part VI.D below, the CFPB acknowledges that this final 
rule may affect PACE origination rates.
    For similar reasons, the CFPB also declines to rely upon voluntary 
industry reforms or current underwriting practices in place of TILA's 
ability-to-repay requirements. Although commenters have indicated that 
industry stakeholders have made significant strides in improving 
consumer protections in recent years, new entrants may not share the 
same commitment to consumer protections and industry practices may 
change over time. Voluntary practices do not ensure the uniform 
applicability of Federal consumer protections inherent in TILA's 
ability-to-repay requirements. Moreover, the congressional mandate in 
EGRRCPA section 307 instructs the CFPB to carry out the purposes of 
TILA's ability-to-repay requirements with respect to PACE financing.
    Further, the CFPB determines that TILA's ability-to-repay regime is 
appropriate for PACE loans notwithstanding certain characteristics of 
PACE financing or PACE programs discussed by commenters. Section 
1026.43(a) applies broadly to consumer credit transactions secured by a 
dwelling.\196\ As with other mortgage lending, the importance of 
assessing a consumer's ability to afford a PACE loan does not depend on 
whether the loan is a purchase-money mortgage or home improvement loan, 
the loan amount, or whether the interest rate is fixed or

[[Page 2466]]

adjustable. These and other characteristics of PACE transactions cited 
by PACE companies are shared by other types of mortgages subject to 
TILA's ability-to-repay regime; they are not unique to PACE 
transactions. Applying ability-to-repay requirements to PACE loans will 
substantially benefit consumers given the structural risks deriving 
from the priority lien securing the loans, as described above.
---------------------------------------------------------------------------

    \196\ 12 CFR 1026.43(a). As provided in 12 CFR 1026.43(a)(1)-
(3), certain residential mortgage loans are exempted from the 
ability-to-repay requirements.
---------------------------------------------------------------------------

    Further, commenters' assertions regarding PACE companies' 
incentives and desire to be paid on schedule by the PACE consumer are 
not inconsistent with the requirements of Sec.  1026.43 or unique to 
PACE creditors or companies. As required by the EGRRCPA, the CFPB has 
accounted for the unique characteristics of PACE transactions in other 
portions of this final rule, including, for example, the requirement in 
Sec.  1026.43(i)(1) that the ability-to-repay determination for PACE 
transactions account for certain increases to escrow account payments 
on the consumer's other mortgage loan that are caused by the PACE 
transaction.
    The CFPB also concludes that permitting the consideration of 
potential energy savings would not be consistent with the purposes of 
TILA section 129C. The CFPB agrees with commenters' observations that 
potential energy savings are too uncertain to reliably inform an 
ability-to-repay determination. Commenters supporting the consideration 
of potential energy savings did not provide specific recommendations to 
address this uncertainty, such as, for example, how to account for 
potential variability in consumer usage patterns, external energy 
prices, and technological developments.
1026.43(c)(2) Basis for Determination
1026.43(c)(2)(iv)
    Section 1026.43(c)(2) sets forth factors creditors must consider 
when making the ability-to-repay determination required under Sec.  
1026.43(c)(1), and the accompanying commentary provides guidance 
regarding these factors. Section 1026.43(c)(2)(iv) provides that one 
factor a creditor must consider is the consumer's payment obligation on 
any simultaneous loan that the creditor knows or has reason to know 
will be made at or before consummation of the covered transaction. The 
CFPB proposed to add new comment 43(c)(2)(iv)-4 to provide additional 
guidance to creditors originating PACE transactions. For the reasons 
described in the proposal and as discussed below, the CFPB is adopting 
as proposed comment 43(c)(2)(iv)-4.
    Comment 43(c)(2)(iv)-4 provides that a creditor originating a PACE 
transaction knows or has reason to know of any simultaneous loans that 
are PACE transactions if the transactions are included in any existing 
database or registry of PACE transactions that includes the geographic 
area in which the property is located and to which the creditor has 
access.
    Comment 43(c)(2)(iv)-4 helps address concerns about the prevalence 
of ``loan splitting'' and ``loan stacking'' in the PACE industry that 
were raised by consumer groups and other stakeholders in comments to 
the Advance Notice of Proposed Rulemaking. As described in those 
comments, loan splitting refers to the practice of a contractor 
dividing a loan for one consumer into more than one transaction to make 
each transaction appear more affordable, while loan stacking refers to 
contractors returning to a PACE borrower to offer additional PACE 
financing (often through different creditors). The CFPB's statistical 
analysis indicates that a little more than 13 percent of PACE borrowers 
between 2014 and 2019 received multiple PACE loans, with many of these 
transactions originated simultaneously or within a few months of each 
other, which could be indicative of loan splitting or stacking.\197\ 
About one-fourth of PACE borrowers with multiple PACE loans consummated 
multiple loans in the same month, and about three-quarters of PACE 
borrowers with multiple PACE loans consummated more than one loan 
within the same 6-month period.\198\ In some cases, the creditor 
originating the second or successive PACE loan might not be aware of 
previous loans, due to delays in recording.
---------------------------------------------------------------------------

    \197\ See PACE Report, supra note 12, at 12, 24.
    \198\ See id. at 24.
---------------------------------------------------------------------------

    No commenters opposed the adoption of proposed comment 
43(c)(2)(iv)-4. Several commenters, including several consumer groups 
and a State agency, supported the adoption of proposed comment 
43(c)(2)(iv)-4. These commenters indicated that the comment could 
provide an effective means of addressing the prevalence of loan 
splitting and loan stacking in the PACE industry.
    Several consumer groups supporting the proposed comment recommended 
further amendments. Two consumer groups recommended that the CFPB 
clarify further that a PACE company is obligated to search for other 
PACE loans on a property if the PACE company knows or has reason to 
know that a home improvement contractor has been involved in loan 
splitting or loan stacking, or if the relevant home improvement 
contract shows that the total cost of a PACE transaction exceeds the 
program's loan-to-value limit. These commenters also stated that the 
CFPB should amend the definition of ``simultaneous loan'' in existing 
Sec.  1026.43(b)(12) to include simultaneous unsecured loans that the 
PACE company has made or will make at or before consummation of the 
PACE transaction. These commenters reasoned that this amendment would 
be appropriate because many PACE companies market unsecured home 
improvement loans in tandem with PACE loans. Several other consumer 
groups stated that the CFPB should require additional due diligence 
beyond that in proposed comment 43(c)(2)(iv)-4 to ensure there are no 
other PACE liens associated with a property and included a credit check 
as one example.
    The CFPB declines to adopt these recommended changes. Finalizing 
comment 43(c)(2)(iv)-4 as proposed, in concert with existing comment 
43(c)(2)(iv)-2, which elaborates on the circumstances in which a 
creditor knows or has reason to know of simultaneous loans, protects 
against the practices of loan splitting and loan stacking. Comment 
43(c)(2)(iv)-2 helps clarify, for example, that a creditor may comply 
with the requirements of Sec.  1026.43(c)(2)(iv) by ``follow[ing] 
policies and procedures that are designed to determine whether at or 
before consummation the same consumer has applied for another credit 
transaction secured by the same dwelling.'' The CFPB also declines to 
adopt commenters' suggestion to expand the definition of simultaneous 
loan to include simultaneous unsecured loans \199\ and notes that Sec.  
1026.43(c)(2)(vi) requires consideration of a consumer's current debt 
obligations, to include unsecured loan products.
---------------------------------------------------------------------------

    \199\ Section 1026.43(c)(2)(iv) refers to a ``simultaneous 
loan,'' and Sec.  1026.43(b)(12) defines simultaneous loan as 
``another covered transaction or home equity line of credit subject 
to Sec.  1026.40 that will be secured by the same dwelling and made 
to the same consumer at or before consummation of the covered 
transaction or, if to be made after consummation, will cover closing 
costs of the first covered transaction.''
---------------------------------------------------------------------------

1026.43(c)(3) Verification Using Third-Party Records
    In general, a creditor must verify the information that the 
creditor relies on in determining a consumer's repayment ability under 
Sec.  1026.43(c)(2) using reasonably reliable third-party records. The 
CFPB proposed to amend comment 43(c)(3)-5 to clarify how this

[[Page 2467]]

requirement applies to consumers with existing PACE transactions.\200\ 
Current comment 43(c)(3)-5 provides that, ``[w]ith respect to the 
verification of mortgage-related obligations that are property taxes 
required to be considered under Sec.  1026.43(c)(2)(v), a record is 
reasonably reliable if the information in the record was provided by a 
governmental organization, such as a taxing authority or local 
government.'' Additionally, the comment provides that the creditor 
complies with Sec.  1026.43(c)(2)(v) by relying on property taxes 
referenced in the title report if the source of the property tax 
information was a local taxing authority. The CFPB proposed to amend 
comment 43(c)(3)-5 to clarify that a creditor that knows or has reason 
to know that a consumer has an existing PACE transaction does not 
comply with Sec.  1026.43(c)(2)(v) by relying on information provided 
by a governmental organization, either directly or indirectly, if the 
information provided does not reflect the PACE transaction. For 
example, if a consumer informs the creditor of an existing PACE 
transaction during the application process, the creditor does not 
comply with Sec.  1026.43(c)(2)(v) by verifying the consumer's property 
taxes solely using property tax records or property tax information in 
a title report that do not include the existing PACE transaction.
---------------------------------------------------------------------------

    \200\ As discussed above, the CFPB is finalizing its proposal to 
clarify that payments for pre-existing PACE transactions are 
considered a property tax and therefore mortgage-related obligations 
under Sec.  1026.43(b)(8). See discussion of comment 43(b)(8)-2 in 
the section-by-section analysis of Sec.  1026.43(b)(8), supra.
---------------------------------------------------------------------------

    The CFPB received limited comments on this aspect of the proposal. 
Commenters who addressed the proposed amendment to comment 43(c)(3)-5, 
including a few consumer groups and a State agency, were supportive of 
the proposed amendment. The CFPB finalizes as proposed the amendment to 
comment 43(c)(3)-5.
1026.43(i) PACE Transactions
1026.43(i)(1)
    Many consumers who obtain PACE transactions have pre-existing 
mortgages that require the payment of property taxes through an escrow 
account.\201\ Consumers with such pre-existing mortgages will typically 
also make their PACE transaction payments through their existing escrow 
account. Under certain circumstances, the addition of payments for a 
PACE transaction can result in a sharp increase in the consumer's 
escrow payments. The PACE Report finds that, on average, a consumer's 
total property taxes likely increased by almost 88 percent as a result 
of the PACE loan payment, and more than a quarter of PACE borrowers' 
property tax payments likely increased by double or more.\202\ This 
increase is relevant to the consumer's ability to repay the PACE 
transaction. The CFPB proposed to add new Sec.  1026.43(i)(1) to 
require that a creditor making the repayment ability determination 
under Sec.  1026.43(c)(1) and (2) also consider any monthly payments 
the consumer will have to pay into the consumer's escrow account as a 
result of the PACE transaction that are in excess of the monthly 
payment amount considered under Sec.  1026.43(c)(2)(iii). For the 
reasons described below, the CFPB is finalizing Sec.  1026.43(i)(1) as 
proposed.
---------------------------------------------------------------------------

    \201\ Regulation X provides that an escrow account is any 
account established or controlled by a servicer on behalf of a 
borrower to pay taxes, insurance premiums, or other charges with 
respect to a federally related mortgage loan, including those 
charges that the servicer and borrower agreed to have the servicer 
collect and pay. 12 CFR 1024.17(b).
    \202\ See PACE Report, supra note 12, at 13.
---------------------------------------------------------------------------

    Section 1026.43(i)(1) requires the ability-to-repay determination 
for PACE loans to consider, in addition to the factors in Sec.  
1026.43(c)(2)(i) through (viii), any monthly payments that the creditor 
knows or has reason to know the consumer will have to pay into an 
escrow account as a result of the PACE transaction that are in excess 
of the monthly payment amount considered under Sec.  
1026.43(c)(2)(viii).
    Section 1026.43(i)(1)(i) and (ii) provides additional detail on the 
factors creditors must take into account when considering any monthly 
payments that the creditor knows or has reason to know the consumer 
will have to pay into the consumer's escrow account as a result of the 
PACE transaction that are in excess of the monthly payment amount 
considered under Sec.  1026.43(c)(2)(iii). Under the escrow 
requirements in Regulation X, servicers are permitted to charge an 
additional amount to maintain a cushion of no greater than one-sixth 
(\1/6\) of the estimated total annual payments from the escrow 
account,\203\ and as explained in the proposal, the CFPB understands 
that servicers frequently charge the full allowable amount of this 
cushion. Accordingly, Sec.  1026.43(i)(1)(i) provides that, in making 
the consideration required by Sec.  1026.43(i)(1), creditors must take 
into account the cushion of one-sixth (\1/6\) of the estimated total 
annual payments attributable to the PACE transaction from the escrow 
account that the servicer may charge under Regulation X, Sec.  
1024.17(c)(1), unless the creditor reasonably expects that no such 
cushion will be required, or unless the creditor reasonably expects 
that a different cushion amount will be required, in which case the 
creditor must use that amount.
---------------------------------------------------------------------------

    \203\ 12 CFR 1024.17(c)(1).
---------------------------------------------------------------------------

    Section 1026.43(i)(1)(ii) addresses the payment spike that can 
result from a delay in incorporating the PACE transaction into the 
consumer's escrow payments. PACE transactions are distinct from non-
PACE mortgage loans in many respects, including the timing of when the 
first PACE payment is due and their annual or semi-annual repayment 
schedule. Consumers who are required to make their PACE payments 
through their existing escrow account only begin repaying their PACE 
transaction once their mortgage servicer conducts an escrow account 
analysis and adjusts their monthly payment to reflect the addition of 
the PACE transaction to their property tax bill.\204\ The CFPB 
understands that the timing of this analysis--and whether the servicer 
knows of the PACE transaction at the time of the first analysis 
following consummation--can have a significant impact on the amount of 
the consumer's initial escrow payments once adjusted to incorporate the 
PACE transaction. Accordingly, Sec.  1026.43(i)(1)(ii) requires that, 
in considering the amount specified by Sec.  1026.43(i)(1), if the 
timing for when the servicer is expected to learn of the PACE 
transaction is likely to result in a shortage or deficiency in the 
consumer's escrow account, the creditor must take into account the 
expected effect of any such shortage or deficiency on the monthly 
payment that the consumer will be required to pay into the consumer's 
escrow account.
---------------------------------------------------------------------------

    \204\ A servicer must conduct an escrow account analysis every 
12 months but may, and in some cases must, do so more frequently. 
See generally 12 CFR 1024.17(c)(3) (discussing annual escrow account 
analyses).
---------------------------------------------------------------------------

    Numerous commenters, including consumer groups, a State agency, and 
a mortgage-industry trade association, supported the adoption of 
proposed Sec.  1026.43(i)(1). These commenters discussed the 
possibility of large escrow payment increases resulting from PACE 
transactions and the associated lack of transparency for consumers 
seeking to understand the effect of a PACE transaction on their future 
payments. For example, consumer groups stated that the annual escrow 
analysis is often conducted before the upcoming year's tax bills are 
issued, meaning that the escrow payment calculation does not reflect 
the actual amount owed. They expressed that, if there is a large, 
unanticipated increase in the property tax bill, such as from the 
addition of a PACE loan, the servicer will advance

[[Page 2468]]

the full amount owed and the escrow account will carry a deficiency 
forward. These commenters stated that, at the next annual escrow 
account analysis, the servicer will calculate the new escrow payment by 
adding to the base payment a reserve cushion of up to one-sixth (\1/6\) 
of the annual property charges, an amount sufficient to cover the prior 
year's PACE payment, and an amount to cover the upcoming year's PACE 
payment that was not accounted for in the prior year's escrow analysis. 
They asserted that the resulting adjustment to the escrow account 
causes consumers to experience a sharp increase in their escrow payment 
many months--or even over a year--after the PACE transaction was 
originated.
    These consumer groups stated that the way PACE programs currently 
address the interaction between PACE transactions and escrow accounts 
is inadequate to address this predictable payment spike. They expressed 
that, for example, PACE companies do not provide consumers information 
on the estimated effect of the PACE transaction on their existing 
escrow account or help PACE consumers communicate with their mortgage 
servicer regarding their escrow account. They stated further that 
consumer advocates have found in many cases that PACE borrowers 
experience severe payment shocks when a mortgage servicer ultimately 
incorporates a PACE loan into a consumer's escrow account.
    Consumer groups supporting the proposal recommended that the CFPB 
require consideration of the borrower's most recent escrow account 
statement and the expected timing of the first tax bill following the 
consummation of the PACE transaction. These commenters also suggested 
that the CFPB amend Sec.  1026.43(c)(5)(ii) to include PACE 
transactions. Section 1026.43(c)(5)(ii) sets forth special rules for 
the calculation of the monthly payment for loans with a balloon 
payment, interest-only loans, and negative amortization loans,\205\ and 
the commenters suggested that the CFPB provide for similar treatment 
for PACE transactions.
---------------------------------------------------------------------------

    \205\ See 12 CFR 1026.43(c)(5)(ii).
---------------------------------------------------------------------------

    Several commenters, including mortgage-industry trade associations, 
consumer groups, and a PACE company, stated that the CFPB should 
require notification to a consumer's pre-existing mortgage servicer 
when a PACE transaction is originated, to protect consumers with 
mortgage escrows from payment spikes. Two consumer groups expressed 
that this approach would be beneficial because the mortgage servicer is 
more likely than the consumer to have the necessary information and 
understanding of escrow mechanics to anticipate escrow shocks. 
Mortgage-industry trade associations stated that such notification 
would promptly educate consumers on the true consequences of the PACE 
transaction and promote servicers' awareness of a potential priority 
lien. One PACE company stated that the CFPB should require mortgage 
servicers to timely update escrow account payments following the PACE 
transaction origination.
    Several PACE industry stakeholders opposed the adoption of proposed 
Sec.  1026.43(i)(1). Two PACE companies asserted that evidence of 
escrow payment spikes is limited, and that, where payment shocks do 
occur, the cause is untimely escrow account analyses by mortgage 
servicers. One PACE company stated that escrow spikes cannot be 
foreseeable to a PACE company because it might not be able to ascertain 
when the consumer's mortgage servicer will conduct its next analysis. 
This commenter recommended that the CFPB substitute a servicer 
notification requirement in place of proposed Sec.  1026.43(i)(1)(ii) 
because it stated that a notification requirement is adequate to 
alleviate escrow payment spikes. Another PACE company stated that, in 
California, existing PACE contracts direct the consumer to inform their 
servicer of their annual PACE payment and that Florida law requires 
consumers to notify their mortgage servicer of the consumer's intent to 
enter into a financing agreement along with the maximum principal 
amount to be financed.
    Having considered the comments received, the CFPB is finalizing 
Sec.  1026.43(i)(1) as proposed. Requiring PACE creditors to consider 
foreseeable changes to escrow payments caused by the repayment of the 
PACE loan is entirely consistent with the statutory mandate. If, as 
some commenters to the proposal noted, the servicer analyzes the escrow 
account before property tax bills are issued, the servicer will advance 
the full property tax amount, including the amount owed on the PACE 
transaction. The escrow account is then likely to carry a negative 
balance (a deficiency) due to the prior year's PACE payment. As part of 
the next escrow account analysis, the servicer will add the upcoming 
year's PACE payment that was not accounted for in the prior year's 
escrow analysis to the anticipated disbursements, which will likely 
cause the anticipated escrow account balance to fall short of the 
target required by the servicer to pay all escrow disbursements for the 
coming year (an escrow shortage). The servicer may then require the 
borrower to pay additional monthly deposits to the account to eliminate 
the deficiency, the shortage, or both, and adjust the reserve cushion 
to account for the PACE loan, causing the required escrow payment to 
increase. While the initial increase in the escrow payment would not 
last for the entire remaining duration of the PACE transaction, it 
could last for a year or longer and thus have a direct bearing on the 
consumer's ability to afford their PACE transaction during the 
timeframe in which this higher amount is owed.
    The CFPB acknowledges one PACE company's concern that creditors may 
not know the exact timing of when the servicer will conduct its next 
escrow account analysis, which could impact the amount of any escrow 
spike. However, PACE creditors can comply with Sec.  1026.43(i)(1) 
using information that is available to them at the time of the ability-
to-repay determination. Additionally, PACE creditors have the option to 
meet the requirement in Sec.  1026.43(i)(1)(ii) regarding expected 
escrow shortages or deficiencies by promptly notifying the servicer 
about the new PACE transaction. Where a creditor provides prompt 
notification to the servicer, the CFPB concludes that it is reasonable 
for the creditor to assume that the time at which the servicer learns 
of the PACE transaction will likely not result in a shortage or 
deficiency in the consumer's escrow account for the purposes of Sec.  
1026.43(i)(1)(ii). More generally, while Sec.  1026.43(i)(1)(ii) does 
require creditors to take into account the possibility of an escrow 
shortage, it does not require creditors to accurately predict the exact 
amount of a shortage or deficiency on the monthly payment that the 
consumer will be required to pay into the consumer's escrow account.
    With regard to commenters' suggestion to amend Sec.  
1026.43(c)(5)(ii) to include PACE transactions, the CFPB concludes that 
Sec.  1026.43(i)(1) is sufficient to address the risks of increased 
escrow payments. The CFPB also declines to require creditors to 
consider the consumer's most recent escrow account statement and the 
expected timing of the first tax bill following the consummation of the 
PACE transaction. PACE creditors have flexibility to determine on a 
case-by-case basis how best to ensure that consumers have the ability 
to repay their PACE loans in light of escrow delays. In exercising that 
flexibility, the CFPB expects that many creditors will find it helpful 
to review the consumer's most recent escrow account statement and the 
expected timing of the first tax

[[Page 2469]]

bill following consummation. The CFPB is not finalizing any servicer 
notification requirements, but PACE creditors voluntarily may notify a 
consumer's servicer of the PACE transaction and doing so could aid 
creditors in ensuring affordability and making the ability-to-repay 
determination, as discussed above.
1026.43(i)(2)
    EGRRCPA section 307 requires the CFPB to prescribe regulations that 
carry out the purposes of TILA section 129C(a) with respect to PACE 
transactions. The CFPB proposed in Sec.  1026.43(i)(2) to apply the 
Regulation Z ability-to-repay framework to PACE transactions without 
providing for a qualified mortgage presumption of compliance for PACE 
transactions. For the reasons provided below, the CFPB is finalizing 
Sec.  1026.43(i)(2) as proposed. Section 1026.43(i)(2) provides that, 
notwithstanding Sec.  1026.43(e)(2), (e)(5), (e)(7), or (f), a PACE 
transaction is not a qualified mortgage as defined in Sec.  1026.43. 
This provision excludes PACE transactions from eligibility for each of 
these qualified mortgage categories in Sec.  1026.43, General Qualified 
Mortgage, Small Creditor Qualified Mortgage, Seasoned Qualified 
Mortgage, and Balloon-Payment Qualified Mortgage.\206\ The CFPB 
concludes that it would be inappropriate to provide PACE transactions 
eligibility for a presumption of compliance with the ability-to-repay 
requirements, particularly given the risk that PACE loans are not 
affordable and the lack of creditor incentives to consider repayment 
ability in this market.
---------------------------------------------------------------------------

    \206\ The CFPB also appreciates that, as a consequence of this 
final rule, PACE transactions will not be permitted to include 
prepayment penalties. 15 U.S.C. 1639c(c); 12 CFR 1026.43(g). The 
CFPB understands that, in general, PACE transactions currently do 
not include these penalties.
---------------------------------------------------------------------------

    A purpose of the qualified mortgage provisions in TILA section 129C 
is to assure that consumers are offered and receive residential 
mortgage loans on terms that reasonably reflect their ability to repay 
the loans and that are understandable and not unfair, deceptive, or 
abusive.\207\ TILA section 129C(b)(3)(B)(i) authorizes the CFPB to 
prescribe regulations that revise, add to, or subtract from the 
criteria that define a qualified mortgage upon a finding that such 
regulations are necessary or proper to ensure that responsible, 
affordable mortgage credit remains available to consumers in a manner 
consistent with the purposes of TILA section 129C; or are necessary and 
appropriate to effectuate the purposes of TILA sections 129B and 129C, 
to prevent circumvention or evasion thereof, or to facilitate 
compliance with such sections.\208\
---------------------------------------------------------------------------

    \207\ 15 U.S.C. 1639b(a)(2).
    \208\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------

    The CFPB finds that the nature of PACE transactions raises serious 
risks that make it unreasonable to presume creditor compliance with the 
ability-to-repay requirements. First, certain aspects of PACE financing 
can result in unaffordable payments that can lead to delinquency, late 
fees, tax defaults, and foreclosure actions. Second, creditors 
originating PACE transactions bear minimal risk of loss related to the 
transaction due to PACE's structure and lien position and therefore 
have reduced incentives to assure that the mortgages made are 
affordable, as required by the statute. Further, the pricing model and 
risk structure associated with PACE transactions may make any price-
based criterion--including the pricing thresholds set forth for the 
General Qualified Mortgage category in Sec.  1026.43(e)(2)(vi) and any 
PACE-specific thresholds the CFPB might develop--an inappropriate 
measure of a consumer's repayment ability at consummation.
    A variety of commenters, including several consumer groups, a State 
agency, and mortgage industry stakeholders, expressed support for the 
CFPB's proposal to exclude PACE transactions from qualified mortgage 
eligibility. Some of these commenters asserted that no qualified 
mortgage eligibility would be appropriate because PACE lending carries 
certain risks for consumers. A State agency stated that the risks of 
PACE lending are not yet fully understood. One mortgage industry 
stakeholder stated that mortgage market safeguards are absent in the 
PACE industry.
    Multiple PACE companies opposed the CFPB's proposal and articulated 
several reasons why PACE transactions should be eligible for qualified 
mortgage status. As discussed in more detail in the section-by-section 
analysis of Sec.  1026.2(a)(14), these commenters challenged the CFPB's 
reliance on the PACE Report and stated that State legislation and 
industry-led reforms have improved outcomes for PACE consumers. One 
PACE company stated that the CFPB should reconsider the exclusion of 
PACE transactions from qualified mortgage status because local 
governmental entities oversee the PACE industry and could address 
consumer protection concerns through their revocation processes.
    A few PACE companies disagreed with the CFPB's determination that 
PACE creditors may lack incentive to ensure repayment ability. One PACE 
company stated that ensuring low delinquency and default rates among 
properties with PACE loans is important for bond ratings. Another 
asserted that it is most cost effective to be repaid on schedule by 
PACE consumers rather than collecting payments through other means. 
This commenter also expressed that, if PACE consumers are not regularly 
repaying their PACE loans, PACE companies could suffer reputational 
risks and other negative effects in the secondary market.
    PACE companies also asserted that the exclusion of PACE 
transactions from qualified mortgage status would have an adverse 
impact on the availability of PACE credit and could lead consumers to 
rely on less regulated and more expensive products. These commenters 
stated that the CFPB failed to adequately weigh access-to-credit 
concerns in conducting its evaluation of the proposal's costs and 
benefits. One PACE company asserted that the proposal's exclusion of 
PACE transactions from qualified mortgage status runs contrary to the 
purposes of TILA 129C because it threatens to constrict the 
availability of PACE credit. It added that regulatory safe harbors such 
as the application of qualified mortgage status may facilitate industry 
compliance and help to minimize litigation associated with uncertain 
compliance obligations. This commenter asserted that the CFPB's 
proposal would impose an ability-to-repay regime that would be more 
onerous than that applicable to mortgage loans, which it stated are 
typically significantly larger than PACE transactions.
    One PACE company recommended that, in lieu of excluding PACE loans 
from qualified mortgage eligibility, the CFPB could provide a qualified 
mortgage status for PACE transactions that would impose other 
guardrails for these loans. This commenter pointed to protections put 
into place for Government-Sponsored Enterprise Patch Qualified Mortgage 
loans \209\ and

[[Page 2470]]

suggested that a qualified mortgage for PACE could include certain 
property-based underwriting requirements, such as no existing liens on 
the property and no recent property tax delinquencies, in addition to 
prohibiting certain loan characteristics, such as negative 
amortization, balloon payments, or prepayment penalties. One PACE 
company disagreed with the CFPB's proposed rationale for not making 
PACE loans eligible for the Small Creditor Qualified Mortgage category. 
This commenter asserted that the role cities and counties play in 
authorizing PACE programs with PACE companies serves to increase PACE 
companies' community focus. It stated further that local governments 
expect PACE companies to focus on the communities they serve and that 
they work together to provide timely services to constituents.
---------------------------------------------------------------------------

    \209\ See generally 78 FR 6408 (Jan. 30, 2013). In the January 
2013 Final Rule, the CFPB established a temporary category of 
qualified mortgage loans consisting of mortgages that (1) comply 
with the same loan-feature prohibitions and points-and-fees limits 
as General Qualified Mortgage loans and (2) are eligible to be 
purchased or guaranteed by Fannie Mae or Freddie Mac while under the 
conservatorship of the FHFA. The provision that created this loan 
category is commonly known as the GSE Patch. Unlike for General 
Qualified Mortgage loans, the January 2013 Final Rule did not 
prescribe a DTI limit for Temporary GSE Qualified Mortgage loans. 
The Temporary GSE Qualified Mortgage loan definition has expired.
---------------------------------------------------------------------------

    Finally, one PACE company asserted that Congress evinced no intent 
to single out PACE transactions as categorically ineligible for 
qualified mortgage status in the EGRRCPA. This commenter stated that, 
while EGRRCPA section 307 does not mention TILA section 129C(b)--it 
requires ability-to-repay regulations under TILA section 129C(a), 
whereas 129C(b) is the subsection providing for qualified mortgage--
EGRRCPA section 307 itself is an insert into subsection 129C(b). The 
commenter stated further that TILA subsection 129C(b) describes a way 
to comply with TILA subsection 129C(a) and that TILA elsewhere refers 
only to 129C(a) in cases where subsection 129C(b) is relevant.
    After considering the comments received, the CFPB is finalizing 
Sec.  1026.43(i)(2) as proposed. The CFPB determines that it is 
inappropriate to provide PACE transactions eligibility for a 
presumption of compliance with the ability-to-repay requirements for 
the reasons discussed below. As the CFPB explained in the proposal, 
certain aspects of PACE financing create risks for consumers and can 
result in unaffordable payment spikes that can lead to delinquency, 
late fees, tax defaults, and foreclosure actions. PACE consumers who 
make their payments through an existing escrow account may face large 
and unpredictable payment spikes that make it difficult for them to 
repay their PACE obligation. For consumers who do not have an existing 
escrow account, the annual or semi-annual payment cadence of payments, 
due simultaneously with large property tax payments, may render PACE 
loans unaffordable.
    Available data that show the broader effect that PACE loans have on 
consumers' finances highlight affordability risks inherent in PACE 
financing. The PACE Report finds clear evidence that PACE transactions 
increase non-PACE mortgage delinquency rates.\210\ For consumers with a 
pre-existing non-PACE mortgage, getting a PACE loan increased the 
probability of a 60-day delinquency on their non-PACE mortgage by 2.5 
percentage points over a two-year period as compared to consumers who 
applied and were approved for, but did not obtain, a PACE loan.\211\ 
For comparison, the average two-year non-PACE mortgage delinquency rate 
for originated borrowers was 7.1 percent prior to obtaining their PACE 
loan.\212\ This means that for the average consumer with a pre-existing 
non-PACE mortgage who obtains a PACE loan, their probability of 
delinquency on their non-PACE mortgage increases 35 percent relative to 
a scenario in which the consumer does not obtain PACE financing.\213\ 
The PACE Report finds that consumers in lower credit score tiers are 
most negatively affected by their PACE transaction, with consumers with 
sub-prime credit scores experiencing an increase in non-PACE mortgage 
delinquency almost two-and-a-half times the average effect, and more 
than 20 times the effect on consumers with super-prime credit 
scores.\214\ In addition, the PACE Report finds that a PACE loan 
increases the probability of both foreclosure and bankruptcy by about 
0.5 percentage points over a two-year period.\215\ The CFPB 
acknowledges, as industry commenters have noted, that lending practices 
and State law have evolved since the origination of the PACE loans 
reflected in the PACE Report. In spite of these improvements, however, 
the structural risks of PACE loans remain, and future industry 
participants may not have the same commitment to consumer protections 
as those that have made the recent improvements. Also, PACE programs 
could expand to new States that may not have consumer protection laws 
for PACE loans. Further, the local government oversight and the 
revocation process cited by one commenter do not alleviate the inherent 
affordability risks associated with PACE transactions or affect the 
CFPB's statutory obligations to assure that mortgage lending is both 
responsible and affordable.
---------------------------------------------------------------------------

    \210\ A large majority of PACE consumers have a primary mortgage 
at the time of the PACE origination. For consumers with a mortgage, 
difficulty in paying the cost of a PACE loan will generally manifest 
in the data as a mortgage delinquency. Payments on PACE transactions 
are made with property tax payments, and many consumers pay their 
property taxes through their monthly mortgage payment. See PACE 
Report, supra note 12, at 3.
    \211\ Id. at 26-27. As in the CFPB's analysis in its 2020 final 
rule (General Qualified Mortgage Final Rule), the PACE Report uses 
delinquencies of at least 60 days as the outcome of interest, to 
focus on sustained periods of delinquency that may indicate 
financial distress, rather than isolated incidents or late payments.
    \212\ Id. at 27.
    \213\ Id.
    \214\ Id. at 36-37.
    \215\ Id. at 33.
---------------------------------------------------------------------------

    The lien status of PACE loans also heightens the risk of negative 
outcomes for consumers and weakens incentives for PACE creditors and 
PACE companies to ensure that consumers have the ability to repay. As 
noted, under most PACE-enabling statutes, the liens securing PACE loans 
take the priority of a property tax lien, which is superior to other 
liens on the property, such as mortgages, even if the other liens 
predated the PACE lien.\216\ In the event of foreclosure, any amount 
owed on the PACE loan is paid by the foreclosure sale proceeds before 
any proceeds will flow to other debt. This, combined with relatively 
low average loan amounts, appears to significantly limit the economic 
risk faced by creditors originating PACE transactions. Further, as 
described in the PACE Report and in part VI.A, mortgage servicers will 
often pay a property tax delinquency on behalf of a consumer regardless 
of whether the consumer had a pre-existing escrow account. This means 
that, for the more than 70 percent of PACE consumers with a pre-
existing non-PACE mortgage, it is unlikely that the PACE transaction 
would ever cause a loss to the PACE creditor.\217\ In addition, the 
PACE transaction repayment obligation generally remains with the 
property when ownership transfers through foreclosure or otherwise. 
Thus, any balance that remains on the PACE transaction following a 
foreclosure sale will generally remain as a lien on the property for 
future homeowners to repay, further reducing the risk of loss to the 
creditor.
---------------------------------------------------------------------------

    \216\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat. 
sec. 163.081(7).
    \217\ PACE Report, supra note 12, at 18.
---------------------------------------------------------------------------

    Although certain market pressures may provide some incentive to 
ensure low delinquency and default rates as PACE companies asserted--
including pressures from the secondary market for PACE securities--the 
structure of PACE transactions significantly limits creditors' economic 
incentives to determine repayment ability and raises

[[Page 2471]]

risks of consumer harm. A qualified mortgage category with the 
guardrails for PACE loans suggested by one commenter would not address 
these risks inherent to the structure of PACE. TILA specifically 
excludes from the qualified mortgage definition loans with certain 
risky features and lending practices that are well known to present 
significant risks to consumers, including loans with negative 
amortization or interest-only features and (for the most part) balloon 
loans.\218\ PACE transactions likewise have features that create 
significant risks to consumers; the CFPB finds that a presumption of 
compliance for PACE financing is not warranted.
---------------------------------------------------------------------------

    \218\ In the January 2013 Final Rule, the CFPB observed that the 
clear intent of Congress was to ensure that loans with qualified 
mortgage status have safer features and terms than other loans. See, 
e.g.,78 FR 6407, 6426 (Jan. 30, 2013) (discussing ``Congress's clear 
intent to ensure that qualified mortgages are products with limited 
fees and more safe features''); id. at 6524 (discussing ``Congress's 
apparent intent to provide incentives to creditors to make qualified 
mortgages, since they have less risky features and terms'').
---------------------------------------------------------------------------

    The CFPB also concludes that the rationales for the existing 
qualified mortgage categories do not apply for PACE transactions. In 
its 2020 final rule (General Qualified Mortgage Final Rule),\219\ the 
CFPB noted that loan pricing for non-PACE mortgages reflects credit 
risk based on many factors, including DTI ratios and other factors that 
may also be relevant to determining ability to repay, such as credit 
scores, cash reserves, or residual income, and may be a more holistic 
indicator of ability to repay than DTI ratios alone.\220\ However, the 
pricing for PACE loans has some notable differences from the non-PACE 
mortgage market.\221\ The available data on PACE financing demonstrates 
that the pricing for such transactions is tightly bunched, with about 
half of PACE transactions analyzed by the CFPB having APRs between 8.2 
and 9 percent.\222\ For reference, the average prime offer rate for 
primary mortgage loans was around 3.5 percent during the timeframe 
covered by the PACE Report, varying somewhat over time and by loan 
term.\223\ The CFPB's available data indicate that pricing of PACE 
loans is primarily correlated with State and property type and does not 
appear to be an indicator of a consumer's ability to repay. The PACE 
Report confirms that PACE loans are generally not priced based on 
traditional measures of credit risk; it notes that APRs for PACE 
transactions are uncorrelated or very weakly correlated with 
traditional measures of risk such as loan balance, loan-to-value (LTV) 
ratio, or credit score.\224\
---------------------------------------------------------------------------

    \219\ 85 FR 86308 (Dec. 29, 2020).
    \220\ Id. at 86361.
    \221\ See generally part VI.A.
    \222\ PACE Report, supra note 12, at table 2.
    \223\ Id. at 13.
    \224\ Id. at 22-23.
---------------------------------------------------------------------------

    Further, while the CFPB's research indicates some differences in 
delinquency rates on non-PACE mortgages correlated to PACE rate 
spreads, it is not clear that the pricing thresholds for the General 
Qualified Mortgage category would be predictive of early delinquency 
and could be used as a proxy for measuring whether a consumer had a 
reasonable ability to repay at the time the PACE transaction was 
consummated.\225\ According to the CFPB's research, PACE transactions 
with rate spreads above 3.5 percentage points and between 2.25 and 3.49 
percentage points increase delinquency rates on a consumer's non-PACE 
mortgage by an estimated 2.8 and a 1.4 percentage points, respectively, 
and PACE transactions with rate spreads below 2.25 percentage points 
have almost zero effect on non-PACE mortgage delinquency.\226\
---------------------------------------------------------------------------

    \225\ Pursuant to the General Qualified Mortgage Final Rule, a 
loan generally meets the General Qualified Mortgage loan definition 
in Sec.  1026.43(e)(2) only if the APR exceeds the APOR for a 
comparable transaction by less than 2.25, 3.5, or 6.5 percentage 
points, respectively, depending upon the loan amount, whether the 
loan is a first or subordinate lien, and whether the loan is secured 
by a manufactured home. Most PACE transactions would qualify for the 
highest pricing threshold for General Qualified Mortgages, 6.5 
percent, which generally applies to transactions with loan amounts 
of less than $66,156 (indexed for inflation). 12 CFR 
1026.43(e)(2)(vi)(A)-(F).
    \226\ PACE Report, supra note 12, at 40.
---------------------------------------------------------------------------

    Nonetheless, the CFPB concludes that this limited data would not be 
sufficient to provide a basis for applying the current General 
Qualified Mortgage pricing thresholds to PACE transactions even if a 
qualified mortgage were not otherwise inappropriate for the reasons 
discussed above. As discussed in the PACE Report, it is not clear what 
drives variation in the pricing of PACE loans, but it does not appear 
to be a function of traditional measures of credit risk.\227\ Rather, 
in this context it is more plausible that the larger rate spreads 
contributed to the increased credit risk. As a result, even though the 
PACE Report finds that PACE transactions with low rate spreads had 
relatively better delinquency outcomes on the associated mortgages, the 
CFPB concludes that it is not reasonable to presume that a creditor 
that offers a PACE transaction with a low APR and meets the other 
factors required for a General Qualified Mortgage has made a reasonable 
and good faith determination of the individual consumer's ability to 
repay.\228\
---------------------------------------------------------------------------

    \227\ Id. at 23.
    \228\ The CFPB is also skeptical that defining a category of 
qualified mortgages for PACE transactions based on a specific DTI 
threshold would be suitable for PACE. Additionally, given the risk 
factors described above, the statutory requirements for qualified 
mortgage may not be satisfied by defining a category of qualified 
mortgages for low-DTI PACE transactions. Moreover, the CFPB's 
available evidence does not demonstrate a correlation between a PACE 
consumer's DTI and non-PACE mortgage outcomes. The CFPB estimates 
that the effect of a PACE transaction on a consumer's non-PACE 
mortgage is essentially the same for consumers with DTI ratios above 
and below 43 percent, a threshold commonly used in the mortgage 
market and, prior to the General Qualified Mortgage Final Rule, a 
criterion for the General Qualified Mortgage category. Id. at 48-49. 
Even assuming that the data revealed a DTI threshold that was 
sufficiently predictive of early delinquency to serve as a proxy for 
whether a consumer had a reasonable ability to repay at the time of 
consummation, the CFPB doubts that a presumption of compliance would 
be appropriate given the unique characteristics of PACE transactions 
discussed above.
---------------------------------------------------------------------------

    The Small Creditor Qualified Mortgage category in Sec.  
1026.43(e)(5) extends qualified mortgage status to covered transactions 
that are originated by creditors that meet certain size criteria and 
that satisfy certain other requirements. The CFPB created the Small 
Creditor Qualified Mortgage category based on its determination that 
the characteristics of a small creditor--its small size, community-
based focus, and commitment to relationship lending--and the incentives 
associated with portfolio lending together justify extending qualified 
mortgage status to loans that meet the criteria in Sec.  1026.43(e)(5), 
including that the creditor consider and verify the consumer's DTI or 
residual income.\229\
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    \229\ 78 FR 35430, 35485 (June 12, 2013) (``The Bureau believes 
that Sec.  1026.43(e)(5) will preserve consumers' access to credit 
and, because of the characteristics of small creditors and portfolio 
lending described above, the credit provided generally will be 
responsible and affordable.'').
---------------------------------------------------------------------------

    The CFPB concludes that this reasoning does not apply in the 
context of PACE transactions. PACE financing is primarily administered 
by several large PACE companies that administer programs on behalf of 
government creditors in each State where residential PACE is active. 
Although local governments authorize PACE programs and may work closely 
with PACE companies in their communities, the PACE companies' role in 
the transaction eliminates the community-based focus or relationship-
lending features that in part justified treating certain small 
creditors differently for purposes of the Small Creditor Qualified 
Mortgage. In contrast to the CFPB's findings with respect to many small 
creditors, the CFPB is not persuaded that PACE

[[Page 2472]]

companies have a more comprehensive understanding of the financial 
circumstances of their customers or of the economic and other 
circumstances of a community when they administer a program.\230\ 
Moreover, as discussed above, the incentives for creditors are 
different for PACE financing than they are for other loans, limiting 
the effect that holding loans in portfolio has on underwriting 
practices. Even if a loan is held in portfolio, creditors and PACE 
companies bear little risk associated with PACE financing, making it 
likely these entities will be repaid even in the event of foreclosure 
or other borrower distress.
---------------------------------------------------------------------------

    \230\ See 80 FR 59947 (Oct. 2, 2015).
---------------------------------------------------------------------------

    Similarly, the reasoning for the Seasoned Qualified Mortgage loan 
category set out in Sec.  1026.43(e)(7) would not apply to PACE 
transactions. In 2020, the CFPB created the Seasoned Qualified Mortgage 
category for loans that meet certain performance requirements, are held 
in portfolio by the originating creditor or first purchaser for a 36-
month period, comply with general restrictions on product features and 
points and fees, and meet certain underwriting requirements. As 
discussed above, the effect that holding loans in portfolio has on 
underwriting practices is limited for PACE transactions, so the 
portfolio lending requirement would provide only a limited incentive to 
make affordable loans. Additionally, and as noted above, mortgage 
servicers will often pay a property tax delinquency on behalf of a 
consumer who has both a PACE mortgage and a non-PACE mortgage 
regardless of whether the borrower had a pre-existing escrow account. 
For these borrowers, the payment of their property taxes may have no 
connection to their actual ability to repay their PACE transaction, let 
alone to a creditor's good faith and reasonable determination of a 
borrower's ability to repay at consummation. Given this, the CFPB 
determines that it is not appropriate to extend the presumption of 
compliance to these circumstances.
    Moreover, in the context of PACE financing, successful loan 
performance over a seasoning period of 36 months would not give 
sufficient certainty to presume that loans were originated in 
compliance with the ability-to-repay requirements at consummation. 
While a non-PACE mortgage would typically have 36 payments due in the 
seasoning period, thus demonstrating that the loan payments were 
affordable to the consumer on an ongoing basis, a PACE transaction 
would have no more than three or six payments because PACE transactions 
are paid annually or semi-annually. Evidence of successful performance 
over only three or six payments is not sufficiently probative of the 
creditor's compliance with the ability-to-repay requirements at 
consummation for PACE transactions to create a presumption of 
compliance.
    Similar concerns apply to the Balloon-Payment Qualified Mortgage 
category in Sec.  1026.43(f). Section 1026.43(f) permits balloon-
payment loans originated by small creditors that operate in rural or 
underserved areas to qualify for qualified mortgage status, even though 
balloon-payment loans are generally not eligible for General Qualified 
Mortgage status. In addition to the general reasons discussed above for 
not having a qualified mortgage definition for PACE, the same specific 
concerns noted above with respect to the Small Creditor Qualified 
Mortgage--namely, that the involvement of nationwide PACE companies 
limits the applicability of any special features of small creditors 
relevant to the Small Creditor Qualified Mortgage--are equally 
applicable to the Balloon-Payment Qualified Mortgage criteria. 
Moreover, the CFPB is not currently aware of PACE financing with 
balloon payments.
    This determination is consistent with EGRRCPA section 307. EGRRCPA 
section 307 makes no mention of PACE loans qualifying for a presumption 
of compliance with the ability-to-repay requirements it directed the 
CFPB adopt for PACE financing. Rather, it provides in relevant part 
that the CFPB must prescribe regulations that (1) ``carry out the 
purposes of subsection (a)''--i.e., that no creditor may make a 
residential mortgage loan unless the creditor makes a reasonable and 
good faith determination based on verified and documented information 
that, at the time the loan is consummated, the consumer has a 
reasonable ability to repay the loan according to its terms--and (2) 
apply TILA section 130 with respect to ``violations under subsection 
(a)'' to such financing. Nowhere does EGRRCPA section 307 mention TILA 
section 129C(b) (the provisions governing qualified mortgages) or 
otherwise indicate that the CFPB's adoption of ability-to-repay 
requirements specific to PACE loans should make further allowance for 
any presumption of compliance with those requirements. Instead, by 
requiring that the CFPB ``account for the unique nature'' of PACE 
financing, the CFPB understands that Congress concluded that elements 
of the existing ability-to-repay regime for residential mortgage 
loans--including the qualified mortgage provisions--may not be 
appropriate in the case of PACE financing.
    This determination is also consistent with the relevant statutory 
authority under TILA sections 129C(b)(3)(C)(ii), 129C(b)(3)(B)(i), and 
105(a). TILA section 129C(b)(3)(A) directs the CFPB to prescribe 
regulations to carry out the purposes of section 129C and TILA section 
129C(b)(3)(B)(i) in turn authorizes the CFPB to prescribe regulations 
that revise, add to, or subtract from the criteria that define a 
qualified mortgage upon a finding that such regulations are necessary 
or proper to ensure that responsible, affordable mortgage credit 
remains available to consumers in a manner consistent with the purposes 
of this section, are necessary and appropriate to effectuate the 
purposes of this section and section 129B, to prevent circumvention or 
evasion thereof, or to facilitate compliance with such sections. TILA 
section 105(a) likewise provides that regulations implementing TILA may 
contain such additional requirements, classifications, 
differentiations, or other provisions, and may provide for such 
adjustments and exceptions for all or any class of transactions, as in 
the judgment of the CFPB are necessary or proper to effectuate the 
purposes of TILA, to prevent circumvention or evasion thereof, or to 
facilitate compliance therewith. Consistent with those authorities, 
after taking into account the purposes of the ability-to-repay and 
qualified mortgage provisions and the unique nature of PACE financing, 
the CFPB concludes that there is ample reason not to extend a 
presumption of compliance with the ability-to-repay requirements to 
PACE transactions.
    The CFPB recognizes that Sec.  1026.43(i)(2) may impact the 
availability of PACE credit. The CFPB finds that any credit access 
impacts must be justified against the consumer protection risks of 
extending qualified mortgage status to PACE transactions. TILA section 
129C authorizes the CFPB to modify the qualified mortgage criteria 
where necessary to ensure the availability of responsible, affordable 
mortgage credit.\231\ The above analysis and the PACE Report call into 
question the extent to which the availability of PACE transactions 
increases the supply of such credit.
---------------------------------------------------------------------------

    \231\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------

1026.43(i)(3)
    EGRRCPA section 307 requires the CFPB to ``prescribe regulations 
that carry out the purposes of [TILA's ATR

[[Page 2473]]

requirements] and apply [TILA] section 130 with respect to violations 
[of TILA's ATR requirements] with respect to [PACE] financing, which 
shall account for the unique nature of [PACE] financing.'' Section 
1026.43 currently applies to the creditor of any transaction that is 
subject to Sec.  1026.43's ability-to-repay requirement. The CFPB 
proposed Sec.  1026.43(i)(3) to also apply the requirements of Sec.  
1026.43 to any PACE company that is substantially involved in making 
the credit decision for a PACE transaction. The CFPB is finalizing 
Sec.  1026.43(i)(3) as proposed. Section 1026.43(i)(3) clarifies that a 
PACE company is ``substantially involved'' in making the credit 
decision if it makes the credit decision, makes a recommendation as to 
whether to extend credit, or applies criteria used in making the credit 
decision. Section 1026.43(i)(3) also applies TILA section 130 \232\ to 
covered PACE companies that fail to comply with Sec.  1026.43.
---------------------------------------------------------------------------

    \232\ 15 U.S.C. 1640.
---------------------------------------------------------------------------

    Several consumer groups supported extending ability-to-repay 
requirements to PACE companies in addition to PACE creditors. Two 
stated that defining ``creditor'' to include PACE companies for 
purposes of Sec.  1026.43 would implement EGRRCPA section 307's mandate 
to consider the unique characteristics of PACE. One consumer group, as 
discussed under Sec.  1026.43(b)(14), supported including home 
improvement contractors or subcontractors under the definition of 
``PACE company'' to expand the parties who would be subject to the 
ability-to-repay requirements.
    A number of consumer groups, a mortgage-industry trade association, 
a State agency, and an individual commenter also supported applying 
TILA civil liability for violations of the PACE ability-to-repay rules. 
They stated, for example, that the civil liability provisions could 
deter predatory behavior, mitigate unaffordable PACE lending, reduce 
default and foreclosure risk for borrowers, and afford consumers 
remedies in the face of TILA violations.
    Certain of these consumer groups, as well as a State agency, 
specifically supported making PACE companies subject to civil liability 
under TILA. Two consumer groups stated that defining ``creditor'' to 
include PACE companies for purposes of TILA section 130 would carry out 
the mandate in EGRRCPA section 307 to consider the unique 
characteristics of PACE. They also asserted that such coverage would be 
appropriate because PACE government sponsors delegate origination and 
underwriting processes to PACE companies, and that PACE consumers 
perceive the PACE companies as creditors. They also stated that PACE 
companies assert defenses in litigation that ordinarily apply only to 
government entities, on the theory that the association with a 
government sponsor cloaks the PACE company with the same defenses and 
insulates them from liability. They and other consumer groups stated 
that applying the ability-to-repay and civil liability requirements to 
PACE companies would ensure that State assessment laws do not preclude 
consumers from obtaining relief for TILA violations.
    Several consumer group commenters suggested extending ability-to-
repay or civil liability requirements further, to include home 
improvement contractors who sell PACE financing in the course of 
selling their home improvement products and help originate the loans.
    Several PACE companies opposed the application of TILA section 130 
to PACE companies for violations of Sec.  1026.43. One PACE company 
asserted that the CFPB lacks authority to subject PACE companies to 
ability-to-repay requirements or civil liability under TILA. It stated 
that the fact that government creditors are insulated from liability 
authority under TILA section 113(b) means that Congress did not intend 
liability under TILA section 130 to extend to PACE companies.\233\
---------------------------------------------------------------------------

    \233\ TILA section 113(b) provides that ``[n]o civil or criminal 
penalty provided under this subsection for any violation thereof may 
be imposed upon . . . any State or political subdivision thereof, or 
any agency of any State or political subdivision.''
---------------------------------------------------------------------------

    As discussed in the analysis of Sec.  1026.2(a)(14) above, a number 
of commenters opposed covering government entities as creditors under 
TILA or treating PACE loans as TILA credit. One PACE company stated in 
support of this position that it would be incongruous to apply the 
proposed TILA requirements to local government entities acting as PACE 
creditors along with the protections afforded to them under section 
TILA section 113(b). A government sponsor of PACE programs raised 
sovereign immunity objections to the application of TILA liability. It 
also asserted that PACE companies may opt to leave the PACE market if 
subject to civil liability under TILA.
    The CFPB is finalizing Sec.  1026.43(i)(3) as proposed. PACE 
companies play an extensive role in PACE financing programs, as 
described in part II.A. In exchange, PACE companies typically receive 
part of the profit from PACE financing. Given the role that PACE 
companies play in PACE financing, the incentive structure of PACE 
lending, and the fact that PACE companies will often be the parties 
implementing any ability-to-repay requirements, the CFPB concludes that 
application of Sec.  1026.43 to PACE companies that are substantially 
involved in making the credit decision, in addition to creditors, is 
appropriate and consistent with the Congressional mandate in EGRRCPA 
section 307 to implement regulations that carry out the purposes of 
TILA's ability-to-repay provisions. A PACE company that makes the 
credit decision, makes a recommendation as to whether to extend credit, 
or applies criteria used in making the credit decision is 
``substantially involved'' in making the credit decision. A PACE 
company is not substantially involved in making the credit decision for 
purposes of Sec.  1026.43(i)(3) if it merely solicits applications, 
collects application information, or performs administrative tasks. 
Applying section 130 to covered PACE companies will extend the economic 
incentive to comply to a party that bears substantial responsibility 
for the credit decision and that is likely to profit from the 
transaction.
    The application of TILA section 130 to covered PACE companies will 
also enhance consumers' ability to obtain remedies for violation of the 
ability-to-repay rules. TILA section 113(b) \234\ provides that no 
civil or criminal penalties may be imposed under TILA upon any State or 
political subdivision thereof, or any agency of any State or political 
subdivision. PACE creditors are generally government entities that 
would be subject to section 113(b)'s protections. Therefore, without 
application of section 130 to PACE companies, PACE consumers could be 
limited in their ability to obtain remedies for violations of the 
ability-to-repay requirements, frustrating the purposes of TILA and 
EGRRCPA section 307 by potentially allowing for circumvention or 
evasion of the ability-to-repay requirements. Moreover, Congress 
specifically directed the CFPB to apply section 130's liability 
provisions to PACE.
---------------------------------------------------------------------------

    \234\ 15 U.S.C. 1612(b).
---------------------------------------------------------------------------

    The CFPB declines to extend liability under TILA to home 
improvement contractors who sell PACE financing to the consumer or 
assist in the origination process if they are not PACE companies 
substantially involved in making the credit decision or otherwise 
liable under TILA. Finalizing Sec.  1026.43(i)(3) as proposed provides 
adequate protections and remedies for consumers in the PACE 
marketplace. Additionally, the CFPB understands that home

[[Page 2474]]

improvement contractors are not currently substantially involved in 
credit decisions for PACE transactions. The CFPB is only extending 
liability to parties who are PACE companies as defined in Sec.  
1026.43(b)(14) that are substantially involved in making the credit 
decision for a PACE transaction.
    Regarding a government sponsor's comment that Sec.  1026.43(i)(3) 
could result in PACE companies exiting the market, while the CFPB 
acknowledges that some PACE companies may decide to exit the industry 
rather than be liable for the obligation to make good-faith 
determinations of consumers' ability to repay their PACE loans, EGRRCPA 
section 307 mandates the extension of liability in circumstances where 
PACE loans are made without consideration of ability to repay.
    The CFPB uses its authority under EGRRCPA section 307 to apply the 
requirements of Sec.  1026.43 to PACE companies and to apply section 
130 of TILA to PACE companies for violations of Sec.  1026.43.
Appendix H--Closed-End Model Forms and Clauses
    The CFPB is finalizing forms H-24(H), H-25(K), H-28(K), and H-28(L) 
to appendix H to Regulation Z. Forms H-24(H) and H-25(K) provide blank 
model forms for the Loan Estimate and Closing Disclosure illustrating 
the inclusion or exclusion of the information as required, prohibited, 
or applicable under Sec. Sec.  1026.37 and 1026.38 for PACE 
transactions. Forms H-24(H) and H-25(K) are generally based on existing 
forms H-24(G), Mortgage Loan Transaction Loan Estimate--Modification to 
Loan Estimate for Transaction Not Involving Seller, and H-25(J), 
Mortgage Loan Transaction Closing Disclosure--Modification to Closing 
Disclosure for Transaction Not Involving Seller.
    The CFPB stated in the proposal that it planned to publish 
translations of forms H-24(H) and H-25(K) if it finalized the proposed 
additions to appendix H. As discussed above, consumer advocates have 
expressed concerns that the PACE market lacks adequate consumer 
protections, including concerns that PACE financing is 
disproportionately targeted at consumers with limited English 
proficiency. Generally, CFPB stakeholders have underscored the 
importance of language access as a way of ensuring fair and competitive 
access to financial services and products. The CFPB believes that 
competitive, transparent, and fair markets are supported by providing 
translations of key material in the customer's preferred language, 
along with the corresponding English-language material. Accordingly, 
the CFPB is making available forms H-28(K) and H-28(L), which are 
Spanish translations of forms H-24(H) and H-25(K), for PACE creditors 
that wish to use them. Use of these translations is not required under 
the final rule, but the CFPB is providing them as an implementation 
resource for PACE lenders.\235\
---------------------------------------------------------------------------

    \235\ See 12 CFR 1026.37(o)(5)(ii) and 1026.38(t)(5)(viii).
---------------------------------------------------------------------------

    Two consumer groups noted in comments that the proposed model form 
for the Loan Estimate omitted the appraisal disclosure required under 
Sec.  1026.37(m)(1) and recommended its inclusion because appraisals 
play a key role in PACE underwriting. The CFPB is finalizing the model 
forms to include the appraisal disclosure.
    The CFPB is also finalizing several additional pages for the Loan 
Estimates and Closing Disclosures, to reflect variations in the 
information required or permitted to be disclosed.

V. Effective and Compliance Date

    Consistent with TILA section 105(d), the CFPB proposed that the 
final rule would take effect at least one year after publication in the 
Federal Register but no earlier than the October 1 which follows by at 
least six months the date of promulgation. For the reasons discussed 
below, the CFPB is finalizing an effective date of March 1, 2026.
    A PACE company submitted comment to the proposal recommending an 
effective date of at least 30 months from the publication of this final 
rule. The commenter asserted that an extended period to come into 
compliance is warranted by the breadth and complexity of the proposal. 
It stated that the proposal would impact all aspects of its business, 
requiring substantial updates to software, systems, and policies and 
procedures. It also stated that coming into compliance would require 
collaboration with other industry stakeholders, including government 
sponsors and home improvement contractors, and that the CFPB should 
allow industry participants adequate time to work with consultants and 
legal professionals to understand the various requirements. The PACE 
company stated that the CFPB provided the mortgage industry nearly two 
years to come into compliance with the 2013 TILA-RESPA Rule, citing the 
significant cost and system and software changes, and that the changes 
in this proposed rule would be more significant than those in the 2013 
TILA-RESPA Rule.
    The CFPB determines that an effective date of March 1, 2026, 
provides sufficient time for covered parties to come into compliance. 
The ability-to-repay and TILA-RESPA integrated disclosure requirements 
have been in place since 2013, albeit with certain adjustments over 
time. Many of the operational and regulatory complexities have been 
resolved in that time.

VI. CFPA Section 1022(b) Analysis

A. Overview

    In developing this final rule, the CFPB has considered the rule's 
potential benefits, costs, and impacts in accordance with section 
1022(b)(2)(A) of the CFPA.\236\ The CFPB requested comment on the 
preliminary analysis presented in the proposed rule and submissions of 
additional data that could inform the CFPB's analysis of the benefits, 
costs, and impacts, and the discussion below reflects comments 
received. In developing the final rule and the proposed rule, the CFPB 
consulted with the appropriate prudential regulators and other Federal 
agencies, including regarding consistency with any prudential, market, 
or systemic objectives administered by these agencies.\237\ As 
discussed in part II.B above, the CFPB also has consulted with State 
and local governments and bond-issuing authorities, in accordance with 
EGRRCPA section 307.\238\
---------------------------------------------------------------------------

    \236\ 12 U.S.C. 5512(b)(2)(A).
    \237\ 12 U.S.C. 5512(b)(2)(B).
    \238\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
---------------------------------------------------------------------------

    One consumer advocate stated generally that the CFPB's 1022(b) 
analysis in the proposal was appropriate and satisfied the CFPB's 
burden to consider costs, benefits and impacts.
Provisions To Be Analyzed
    Although the final rule has several parts, for purposes of this 
1022(b)(2)(A) analysis, the CFPB's discussion groups the provisions 
into two broad categories. The provisions in each category would likely 
have similar or related impacts on consumers and covered persons. The 
categories of provisions are: (1) the provision to apply the ability-
to-repay requirements of Sec.  1026.43 to PACE transactions, with 
certain adjustments to account for the unique nature of PACE, including 
denying eligibility for any qualified mortgage categories; and (2) the 
provision to clarify that only involuntary tax liens and involuntary 
tax assessments are not credit for purposes of TILA, such that 
voluntary tax liens and voluntary tax assessments that otherwise meet 
the definition of

[[Page 2475]]

credit, such as PACE transactions, are credit for purposes of TILA.
Economic Framework
    Before discussing the potential benefits, costs, and impacts 
specific to this final rule, in the proposal the CFPB provided an 
overview of its economic framework for analyzing the impact and 
importance of creditors and PACE companies considering a consumer's 
ability to repay prior to an extension of credit. The CFPB has 
previously discussed the general economics of ability-to-repay 
determinations in the January 2013 Final Rule and elsewhere,\239\ and 
focused in the proposal on economic forces specific to PACE.
---------------------------------------------------------------------------

    \239\ See, e.g., 78 FR 35430, 35492-97 (June 12, 2013).
---------------------------------------------------------------------------

    In normal lending markets, such as the non-PACE mortgage market, 
creditors generally have an intrinsic profit motive to set loan pricing 
based in part on ability to repay and in turn have an economic 
incentive to determine ability to repay. Indeed, in the January 2013 
Final Rule, the CFPB noted that, even prior to the then-new ability-to-
repay requirements of Regulation Z, most mortgage lenders voluntarily 
collected income information as part of their normal business 
practices, even as the January 2013 Final Rule was adopted to prevent 
lenders who did not follow this practice from harming consumers and the 
financial system. Economic theory says that, to be profitable, a lender 
must apply high enough interest rates to its loans such that the 
average ex ante expected value of the loans in its portfolio is 
positive. The higher the likelihood of nonpayment, the higher the 
interest rate must be to make a profit.\240\ Lenders may price based on 
the average ability to repay in the population, or may price on 
individual risk after making an effort to determine ability to repay, 
but they cannot typically remain profitable in a competitive market if 
they set interest rates while ignoring ability to repay entirely.\241\
---------------------------------------------------------------------------

    \240\ This holds empirically as well. In the General Qualified 
Mortgage Final Rule, the CFPB noted that loan pricing for non-PACE 
mortgages is correlated both with credit risk, as measured by credit 
score, and with early delinquency, as a proxy for affordability. See 
85 FR 86308, 86317 (Dec. 29, 2020).
    \241\ A lender that conducts an ability-to-repay analysis will 
have a more precise measurement of the risk of non-payment, and can 
thus profitably price loans to consumers with high ability to repay 
at a low interest rate, being reasonably assured of repayment, while 
pricing riskier loans at a higher rate to compensate for the higher 
risk of default. A lender that does not conduct an ability-to-repay 
analysis must price loans consistent with the average risk of 
default in the population in order to make a profit. This pooled 
risk rate will involve an interest rate higher than the low rates 
that could otherwise be profitably offered to low-risk consumers. 
Note that this logic applies even if loans are ultimately sold on 
the secondary market and securitized. A rational investor will not 
pay market rate for an asset-backed security where the component 
mortgages are priced at levels consistent with low risk if the 
lender cannot verify that the loans are actually low risk.
---------------------------------------------------------------------------

    The market for PACE financing has some notable differences from the 
typical non-PACE mortgage market, and these differences dampen or 
eliminate the economic incentive for PACE companies to price based on 
ability to repay. Those who stand to receive revenues from PACE 
transactions are shielded from losses in ways that are not common in 
the mortgage market. First, for the more than 70 percent of PACE 
borrowers with a pre-existing non-PACE mortgage,\242\ it is unlikely 
that the PACE transaction would ever cause a loss to the PACE company 
or its investors because mortgage servicers for the non-PACE mortgage 
will often pay a property tax delinquency on behalf of a borrower. 
Second, PACE companies generally will be made whole in the event of 
foreclosure, whether that foreclosure is initiated by the taxing 
authority or a non-PACE mortgage holder, because PACE transactions are 
structured as tax liens and will typically take precedence over any 
non-tax liens, such as those securing pre-existing mortgage loans. 
Third, PACE companies may be made whole even if the foreclosure 
proceeds are insufficient. Because PACE transactions are structured as 
obligations attached to the real property, rather than to the consumer, 
any remaining amounts owed on the PACE loan that are not paid through 
foreclosure proceeds generally will not be extinguished and will 
instead remain on the property for subsequent owners to pay.
---------------------------------------------------------------------------

    \242\ PACE Report, supra note 12, at 18.
---------------------------------------------------------------------------

    The empirical evidence on PACE transactions is consistent with the 
unusual protection from loss that the structure of PACE transactions 
provides for the parties receiving revenue from the loans. The PACE 
Report shows that PACE companies largely did not collect income 
information from applicants when they were not required to by State 
law, consistent with the lack of an economic incentive to verify 
ability to repay.\243\ Moreover, the PACE Report finds that PACE 
transactions are not priced based on individual risk.\244\ The PACE 
Report notes that estimated APRs for PACE transactions are tightly 
bunched, with about half of estimated PACE APRs between 8.2 and 9 
percent.\245\ The Report also notes the PACE APRs are at best weakly 
correlated with credit score, with an average difference of less than 
five basis points between loans made to consumers with deep subprime 
credit scores and consumers with super-prime credit scores.\246\
---------------------------------------------------------------------------

    \243\ Id. at Table 1.
    \244\ Id. at 23.
    \245\ Id. at Table 2.
    \246\ Id. at 23.
---------------------------------------------------------------------------

    In response to the proposal, one PACE company disagreed with the 
above analysis, stating that PACE companies do have an intrinsic 
incentive to consider ability to repay due to the importance of bond 
ratings. According to the commenter, PACE companies' business models 
depend on being able to securitize and sell bonds backed by PACE loans, 
and a high delinquency rate would impact the ratings of those bonds, 
affecting PACE companies' profits.
    With respect to the commenter's assertion that default rates of 
PACE loans affect bond ratings, and thus provide an incentive to ensure 
ability to repay, the CFPB makes two responses. First, as noted above, 
consumers with a non-PACE mortgage generally will not default on a PACE 
loan directly even if they cannot afford the PACE loan, as any property 
tax delinquency will be paid by a mortgage servicer. The CFPB found in 
the PACE Report that at least 70 percent of PACE borrowers have a non-
PACE mortgage, although PACE industry commenters stated this was an 
undercount, and that a fraction closer to 90 percent of PACE borrowers 
had a non-PACE mortgage. This creates an artificially low default rate 
that would be observed by bond investors and would tend to reduce the 
incentives of PACE companies to ensure that PACE loans are affordable 
for consumers. Second, the commenter's assertion that PACE companies 
have an incentive to ensure ability to repay is belied by the conduct 
of PACE companies to date. The CFPB understands that PACE companies 
generally have not undertaken ability-to-repay analyses with attributes 
similar to the TILA requirements where they have not been required to 
by applicable law. For example, PACE companies did not generally 
collect or verify income of PACE borrowers in California until they 
were required to by the 2018 California PACE Reforms. Similarly, PACE 
companies generally did not collect income information in Florida until 
its recent law change in 2024, despite having developed systems to 
capture income information to comply with applicable requirements in 
California.

[[Page 2476]]

Accordingly, the CFPB concludes that PACE companies lack the incentive 
to ensure their borrowers' ability to repay absent legal requirement to 
do so.

B. Baseline for Analysis

    In evaluating the final rule's benefits, costs, and impacts, the 
CFPB considers the impacts against a baseline in which the CFPB takes 
no action. This baseline includes existing regulations, State laws, and 
the current state of the market. In particular, the baseline assumes no 
change in the current State laws and regulations around PACE financing. 
Also, notwithstanding the clarification in this final rule that only 
involuntary tax liens and involuntary tax assessments are excluded from 
being credit under Regulation Z (such that the commentary does not 
exclude PACE transactions), the baseline assumes that the current 
practices of PACE industry stakeholders are not consistent with 
treating PACE financing as TILA credit.
    The CFPB notes that, since the publication of the proposal, the 
baseline has shifted due to changes in State laws. Florida has passed 
legislation that requires verification of consumers' household income 
among other consumer protections.\247\
---------------------------------------------------------------------------

    \247\ See Fla. Stat. sec. 163.081(3)(a)(12).
---------------------------------------------------------------------------

    The CFPB did not receive comments regarding its choice of baseline.

C. Data Limitations and Quantification of Benefits, Costs, and Impacts

    The discussion below relies on information that the CFPB has 
obtained from industry, other regulatory agencies, and publicly 
available sources, including reports published by the CFPB. These 
sources form the basis for the CFPB's consideration of the likely 
impacts of this final rule. The CFPB provides estimates, to the extent 
possible, of the potential benefits and costs to consumers and covered 
persons of this rule, given available data.
    Among other sources, this discussion relies on the CFPB's PACE 
Report, as described in part II.B.4 above. The Report utilizes data on 
applications for PACE transactions initiated between July 1, 2014, and 
December 31, 2019, linked to de-identified credit record information 
through June 2022. As described above, the Report estimates the effect 
of PACE transactions on consumers by comparing approved PACE applicants 
who had an originated PACE transaction (``Originated Consumers'') to 
those who were approved but did not have an originated transaction 
(``Application-Only Consumers''). The Report uses a difference-in-
differences regression methodology, essentially comparing the changes 
in outcomes like mortgage delinquency for Originated Consumers before 
and after their PACE transactions were originated to the same changes 
for Application-Only Consumers. In this discussion of the benefits, 
costs, and impacts of the final rule, the CFPB focuses on results from 
what the Report refers to as its ``Static Model'' which considers 
outcomes over the period between zero to two years prior to the PACE 
transaction and the period between one to three years after.\248\ The 
Report also estimates the effect of the 2018 California PACE Reforms on 
PACE lending in that State, using Florida as a comparison group in a 
difference-in-differences methodology.\249\
---------------------------------------------------------------------------

    \248\ During the year immediately after consummation of a PACE 
transaction, PACE payments generally have not been included in a 
consumer's property tax bill. As discussed further below, it would 
not be appropriate to include this period in an analysis of the 
affordability of PACE loans.
    \249\ Florida's recent State law requiring consideration of a 
borrower's income was enacted in 2024, after the period studied in 
the PACE report.
---------------------------------------------------------------------------

    The CFPB also relies on publicly available data on PACE from State 
agencies and PACE trade associations, as well as on public comments in 
response to the Advance Notice of Proposed Rulemaking.
    The CFPB acknowledges several important limitations that prevent a 
full determination of benefits, costs, and impacts. The CFPB relies on 
the PACE Report for many parts of this discussion, but as discussed in 
the PACE Report itself, the data underlying the Report have 
limitations.\250\ The data used in the Report to evaluate consumer 
impacts are restricted primarily to consumers with a credit record. 
Further, the comparison groups used in the difference-in-differences 
analysis are reasonable but imperfect. In addition, while the 2018 
California PACE Reforms are informative to the CFPB's consideration of 
the impacts of this final rule on consumers and covered persons, this 
final rule has different requirements from the State laws that made up 
the 2018 California PACE Reforms, such that the potential impacts may 
differ.
---------------------------------------------------------------------------

    \250\ Id. at 52.
---------------------------------------------------------------------------

    In light of these data limitations, the analysis below provides 
quantitative estimates where possible and a qualitative discussion of 
the final rule's benefits, costs, and impacts. General economic 
principles and the CFPB's expertise, together with the available data, 
provide insight into these benefits, costs, and impacts. In the 
proposal, the CFPB requested additional data or studies that could help 
quantify the benefits and costs to consumers and covered persons of the 
rule. Commenters largely did not provide such information, except as 
described below.
    PACE industry stakeholders raised a number of concerns regarding 
the PACE Report's methodology.
    A PACE company took issue with the fact that the data request only 
allowed PACE companies to submit information for a single property 
owner, and the fact that if a property was owned by multiple consumers, 
the CFPB's contractor received identifying information on just one of 
the consumers for matching purposes. The commenter stated that, based 
on its own records, 50 percent of properties with PACE loans are 
jointly owned and thus had multiple PACE loan applicants on a single 
loan. The commenter asserted that, by excluding from the analysis 
outcomes for these other applicants, the PACE Report cannot reliably 
make conclusions on the impact of PACE loans on consumer outcomes.
    The CFPB acknowledges that its data collection only sent 
information on one consumer per PACE loan to the CFPB's contractor for 
matching. While this means that some consumers who have PACE loans were 
not included in the PACE Report's analysis, the CFPB does not agree 
that this aspect of the data collection biased the results of the PACE 
Report substantively. Where a PACE loan borrower has a joint non-PACE 
mortgage with another person, the non-PACE mortgage will appear on both 
consumers' credit records, such that the analysis in the PACE Report 
would still track whether that household had difficulty paying their 
non-PACE mortgage. Thus, on balance, the CFPB finds that tracking the 
outcomes of one consumer per PACE loan is sufficiently informative of 
the household's financial outcomes.
    Two PACE companies and an industry trade association stated that 
the PACE Report did not identify all PACE borrowers who had a pre-
existing non-PACE mortgage. The PACE Report finds that 70 percent of 
PACE borrowers had a non-PACE mortgage prior to receiving a PACE loan; 
commenters stated that this fraction is closer to 90 percent. The 
commenters asserted that by failing to identify all those with a 
mortgage in the sample, the CFPB did not accurately capture the impact 
of PACE borrowing.
    The CFPB acknowledges that the true share of PACE borrowers with a 
pre-existing non-PACE mortgage is likely higher than the 70 percent 
identified in the PACE Report. In cases where the non-PACE mortgage is 
in the name of only one member of a household while the PACE loan is in 
the name of another

[[Page 2477]]

member, the methodology used by the CFPB's contractor to extract the 
data used in the PACE Report would omit the non-PACE mortgage. However, 
the CFPB does not agree that this limitation biases or undermines the 
results of the Report. There is no evidence to suggest that PACE 
consumers whom the CFPB might have incorrectly categorized as not 
having a non-PACE mortgage had better outcomes than those who were 
correctly categorized.
    One PACE company stated that it was not appropriate for the PACE 
Report to analyze credit card balances, as homeowners with and without 
PACE loans use credit cards differently, and increased credit card 
balances cannot be attributed to having a PACE loan. The commenter 
asserted that homeowners who financed some projects through a PACE loan 
may be undertaking additional home improvement projects on their homes 
and paying for these using credit cards if the additional projects are 
not PACE-eligible. In addition, two PACE companies stated that the PACE 
Report shows that the analysis for credit card balances did not meet 
the required assumptions for a valid difference-in-differences 
analysis, as it showed balances for Originated Consumers increasing 
relative to Application-Only Consumers prior to the PACE loan 
application.
    The CFPB agrees that homeowners with and without PACE loans may use 
credit cards differently. The results in the PACE Report describing the 
impact of PACE loans on credit card balances are not relied upon for 
the final rule. The CFPB primarily relies on the mortgage estimates 
included in the PACE Report for this 1022(b) analysis, as described 
further below.
    A PACE company and an industry trade association stated that the 
methodology used in the PACE Report was invalid because it did not 
distinguish between the general impact of taking out new credit and the 
specific features of PACE loans such as paying through property tax 
bills. The commenters suggested that any resulting negative impacts 
found in the PACE Report as resulting from a PACE loan are just the 
result of consumers taking on more debt of any kind, rather than being 
specific to PACE financing. One of the commenters noted that increased 
spending and higher debt amounts negatively impact credit score. They 
stated that because credit score is treated as an outcome in the PACE 
Report, consumers with a PACE loan will necessarily perform worse.
    The CFPB acknowledges that the estimates in the PACE Report 
evaluating the impact of a PACE loan include the impact of additional 
debt in general, as well as the specific features of PACE loans that 
differ from other forms of credit. However, the CFPB views this as the 
correct way to evaluate the costs of PACE loans for consumers and thus 
the potential benefits of the rule in preventing such loans. PACE loans 
have a variety of features that are relevant to whether consumers can 
repay, including but not limited to the structure of the obligations, 
the way they are marketed by home improvement contractors and PACE 
companies, the potential that consumers would take on a home 
improvement contract that might not otherwise occur, and the infrequent 
payment cycle relative to non-PACE mortgages, as well as imposing 
additional debt on the consumer. But for the purposes of this rule, to 
determine whether consumers have difficulties affording PACE loans, the 
CFPB must determine the impact of all of these features collectively. 
That is, regardless of whether it is true, as the commenters assert, 
that it is not feasible to disentangle the impact on consumers of the 
various features of PACE loans, the CFPB maintains that this would not 
answer the relevant question. The overall impact of PACE loans on 
consumers is the relevant quantity for this analysis.
    One public PACE provider and its associated local government 
expressed concern that the CFPB did not use data provided by Sonoma 
County, California. The commenters stated that government-run PACE 
programs such as the program in Sonoma County are unique, since they 
are entirely administered by the local government and not a PACE 
company. They asserted that the tax delinquency rate on loans in the 
Sonoma County PACE program are low, around 0.5 percent, similar to the 
annual delinquency rate for all secured parcels in the county. The 
commenters noted that, in the Sonoma County program, property owners 
have a minimum of five years to cure delinquencies before the property 
is subject to sale through a tax defaulted auction.
    While Sonoma County provided data, it was not sufficiently detailed 
to be used in the PACE Report. The Report's main analyses rely on 
comparing consumers with PACE loans to those who were approved for a 
PACE loan but did not end up getting one. Sonoma County provided 
information on about 400 originated PACE loans but did not provide 
information on applications that did not result in a loan. Given the 
CFPB's methodology in the PACE Report, it would not have been possible 
to analyze the outcomes of Sonoma County's government-run program 
separate from those of privately-run PACE programs considered in the 
Report.
    Several PACE companies stated that the control group of 
Application-Only Consumers used in the PACE Report is not comparable to 
Originated Consumers, and that this undermines the results of the 
Report. One commenter asserted that the comparison is invalid because 
the CFPB did not check that the two groups were comparable on loan-to-
value ratio of the underlying mortgage, unemployment, income stability 
over time, variability in mortgage payments, negative equity in 
property, or income verification procedures used by the lender. Another 
commenter asserted that the PACE Report characterizes the two groups as 
having largely similar credit characteristics prior to their PACE 
application dates but disagreed with this characterization, stating 
that the PACE Report shows that Originated Consumers were somewhat more 
likely to have a mortgage, student loan payments, and auto loans than 
Application-Only Consumers. Additionally, the commenter noted that 
Originated Consumers had higher average monthly mortgage payments, 
higher credit card balances, lower credit card limits, and lower 
incomes than Application-Only Consumers.
    On balance, the CFPB finds the Application-Only Consumers to be a 
reasonable control group for the effect of PACE loans on consumer 
outcomes. As discussed in more detail below, although small differences 
exist between Application-Only Consumers and Originated Consumers on 
some observable characteristics, Application-Only Consumers are much 
more similar to Originated Consumers than alternate control groups 
suggested by commenters or considered in the PACE Report. Contrary to 
the views of the commenters, the PACE Report includes extensive 
analysis to substantiate the similarity of the primary control group of 
Application-Only Consumers to Originated Consumers. Appendix B of the 
PACE Report includes several robustness checks exploring alternate 
control groups, all of which are consistent with the results based on 
the main control group of Application-Only Consumers. For example, the 
PACE Report includes an analysis where consumers whose applications for 
a PACE loan were denied are included in the control group. We would 
expect that this comparison would dampen the negative impact of PACE 
loans since these denied consumers likely would have worse financial 
outcomes

[[Page 2478]]

compared to Application-Only Consumers. The PACE Report instead finds 
that including these denied consumers in the control group along with 
approved Application-Only Consumers increases the magnitude of the 
impact of PACE loans on mortgage delinquency, and using only denied 
consumers as the control group increases the magnitude more.
    Two PACE companies and an industry trade association stated that 
the analysis in the PACE Report overstates any negative effects of PACE 
loans on consumers because it excludes the period immediately after 
each PACE loan was originated. Commenters noted that consumers may be 
receiving benefits from the home improvement funded by a PACE loan 
during this period while not making loan payments yet.
    The CFPB disagrees with the assertion of some commenters that the 
CFPB should have considered the effect of PACE loans on consumer 
outcomes between the date of loan origination and the date the first 
payment was due. Consumers cannot be delinquent or have difficulty 
making payments before their loan payments are due, so there is no 
basis to evaluate affordability during this period.
    One PACE company stated that the PACE Report does not correctly 
handle consumers with multiple PACE loans, resulting in inflated non-
PACE mortgage delinquency rates. The commenter asserted that if a 
consumer has multiple PACE loans, they may have multiple properties 
with multiple mortgages, and thus have more opportunity to be 
delinquent on any non-PACE mortgage even if only one of their PACE 
loans is delinquent.
    The CFPB does not agree with certain commenters that the PACE 
Report's inclusion of consumers with multiple PACE loans inflated the 
Report's estimates of delinquency outcomes. The CFPB notes that the 
PACE Report includes a version of its analysis that excluded consumers 
with multiple PACE loans entirely, and this analysis found 
substantively the same result as the main analysis that included 
consumers with multiple loans.\251\
---------------------------------------------------------------------------

    \251\ See PACE Report at 64-65.
---------------------------------------------------------------------------

    One PACE company stated that the PACE Report incorrectly states 
that the CFPB requested data for consumers who applied for PACE loans 
through June 2020, an error that was repeated in the proposal. The 
commenter noted that the CFPB in fact requested and received data on 
PACE applications through December 31, 2019. The commenter asserted 
that the error was significant for the data analysis in the PACE Report 
because data from 2020 and later would be more reflective of current 
market conditions.
    The CFPB acknowledges that the body of the PACE Report incorrectly 
states that the CFPB requested PACE loans originated and PACE 
applications submitted through June 2020, when in fact it requested 
data through December 2019. It is also true that this error was 
repeated in the proposal. The PACE Report includes the original data 
request in Appendix C, which includes the correct dates. However, this 
is not a material error. The Report is clear that all estimates include 
only loans where it was possible to follow a consumer for three years 
after origination. This effectively excludes any loan originated in 
late 2019 or after. Any loans originated in 2020 or later would not 
have been usable for the main analysis of the PACE Report, even if they 
were requested and provided by the PACE companies.
    Two commenters asserted that the 1022(b) analysis did not 
appropriately incorporate recent changes in the PACE industry. One PACE 
company asserted that the analysis included in the PACE Report is no 
longer relevant because PACE financing has changed since the period 
covered by the Report. The PACE Report includes data on PACE 
applications through 2019. The commenter stated that, in 2021, the 
industry imposed self-regulatory measures to address many of the PACE 
Report's concerns. The commenter further stated, as noted in the CFPB's 
proposal, consumer complaints have declined in recent years. The 
commenter asserted that more recent data would better reflect this 
improvement. Similarly, an industry trade association suggested that 
since they believe that the proposed 1022(b) analysis focused on the 
change in mortgage delinquency over a sample period that is unlike the 
current PACE environment, the CFPB should have primarily relied on 
estimates from the PACE Report that are specific to the time period 
after the 2018 California PACE Reforms. The commenter asserted that the 
current environment includes the 2018 California PACE Reforms, and that 
relying on the overall estimate overstated the present costs and 
benefits of the proposal.
    The CFPB does not agree with the commenter's assertion that it was 
inappropriate to focus on PACE loans originated during the period 
covered by the PACE Report. The PACE Report covers the period spanning 
the implementation of 2018 California PACE Reforms and presents results 
separately for loans originated before and after these Reforms became 
law. The PACE Report finds that PACE loans still increase primary 
mortgage delinquency in California during the post-Reform period. The 
CFPB acknowledges that the benefits of the rule may be lower than the 
estimates discussed below if some State laws provide protections 
covered by the rule. The CFPB does not believe this undermines its 
analysis of benefits, costs and impacts, and discusses how this affects 
its choice of baseline above.
    A State-level chamber of congress, eight Members of the U.S. 
Congress, and a State government unit stated that the proposal seemed 
to be targeting Florida and would impose costs on Florida entities 
specifically. The commenters stated that the proposed rule highlighted 
some Florida-specific impacts of the rule, such as an expected decrease 
in applications in that State, and stated that home improvement 
contractors and government entities in Florida would experience 
additional costs. The commenters expressed concern that the proposed 
rule would have a disproportionate impact on Floridians who have 
limited financial means or limited access to credit.
    The rule will apply to covered parties and covered transactions 
nationwide, not only those in Florida. PACE companies have chosen to 
operate PACE programs in just Florida, California, and Missouri 
currently, and this rule will apply equally in all States. 
Additionally, there are multiple other States with legislation enabling 
PACE financing. The rule will apply equally to covered parties who 
begin to operate PACE programs in other States as well.
    One PACE company criticized the CFPB for various aspects of the 
limitations of the data used in the proposed rule and enumerated the 
number of times that the CFPB stated that it lacked information on 
costs relevant to the proposal. The commenter stated that some of this 
missing information was crucial, and that the proposal lacked insight 
into costs for PACE companies and home improvement contractors to 
comply with the rule, or costs for consumers to undertake appraisals.
    The CFPB used all data that were available and requested comment 
and data from the public both generally and on specific areas where the 
CFPB lacked information to quantify potential costs and benefits. As 
noted below, the CFPB largely did not receive any specific information 
from commenters regarding the impact analysis topics on which it sought 
comment.

[[Page 2479]]

    The same PACE company also stated that the data in the PACE Report 
are flawed because not all consumers were matched to credit records 
from the consumer reporting agency that served as the CFPB's contractor 
as described in part II.B. The commenter particularly disputed the 
CFPB's assertion, in the PACE Report, that 99 percent of PACE borrowers 
had sufficient credit histories to have a credit score. The commenter 
stated that the 99 percent figure ignores the 22 percent of consumers 
that were not matched to credit record data. They stated further that 
omitting this 22 percent of PACE applicants is problematic for many of 
the Report's conclusions, including the assumption that PACE customers 
have access to other credit.
    The CFPB does not agree with the commenters' assertion that the 
match rate of the data used in the PACE Report was problematic. As 
discussed in the PACE Report, while some PACE consumers who did not 
match to credit report data were likely credit invisible (consumers who 
do not appear in credit record data), others may have been unmatched 
due to data issues from either the PACE companies or the credit 
reporting company. The matching in the Report was based only on name 
and address, due in part to concerns by the PACE companies about 
sharing more identifying information. While this matching was largely 
successful, an imperfect match rate is unsurprising given that 
addresses could be out of date, or names could include spelling errors. 
Essentially all PACE consumers who matched to credit record data had 
other credit available, meaning that at least 77 percent of PACE 
consumers had other credit options, supporting the CFPB's conclusion 
that PACE consumers had other credit options.
    One PACE company asserted that, since the CFPB made methodological 
decisions that trimmed the sample used in the PACE Report, the 
resulting sample was unrepresentative. The commenter asserted that the 
main analysis in the PACE Report omits consumers who were not matched 
to credit bureau data or who did not have mortgage payments due prior 
to the PACE loan origination date. The commenter also asserted that 
consumers who were not matched to the credit record data likely were 
credit invisible.\252\ The commenter asserted that the population of 
consumers who were not in the data of the CFPB's contractor would have 
benefitted from a PACE loan because of their lack of access to other 
credit products, and that it was a mistake to assume in the PACE Report 
that the unmatched consumers would perform the same as the matched 
consumers. The commenter also asserted that, for some of the analyses 
in the PACE Report that focus on mortgage outcomes, requiring the 
consumers in the sample to have had a mortgage in the credit bureau 
data excluded new homeowners. The commenter also took issue with 
limiting the sample used in the static difference-in-differences model 
to those who have two years of credit bureau data before their PACE 
loan origination date and three years following.
---------------------------------------------------------------------------

    \252\ This commenter seemed to conflate consumers with thin 
credit files--those with insufficient information on their credit 
reports to generate a credit score--with consumers who do not appear 
in credit record databases at all. The PACE Report data includes all 
consumers for whom the CFPB's contractor could successfully match, 
regardless of whether that consumer had sufficient credit history to 
be scored. To avoid confusion, the CFPB characterizes the comment as 
being in reference to consumers who do not have a credit record.
---------------------------------------------------------------------------

    The CFPB also does not agree with commenters that estimates of the 
PACE Report were biased by the consumers who were not able to be 
matched to credit record data. It is possible that these unmatched 
consumers were credit invisible, but this seems unlikely to be true in 
the vast majority of cases since PACE borrowers must be homeowners and 
most home purchases are funded by mortgages.\253\ Even mortgages that 
are paid in full will remain on a consumer's credit report, potentially 
indefinitely, and thus would provide a potential match for the CFPB's 
contractor, even if the consumer otherwise had no active credit 
accounts. Moreover, while the CFPB does not have data indicating what 
share of PACE consumers are credit invisible, it is reasonable to 
expect that the share of consumers who are credit invisible is 
proportional to the share who are visible but have credit files too 
thin to calculate a credit score. As noted above, 99 percent of PACE 
consumers that the CFPB's contractor was able to match were also 
scored, compared to about 90 percent of the U.S. population 
overall.\254\ This suggests that PACE consumers are if anything less 
likely to be credit invisible than the average U.S. consumer. Thus, the 
most reasonable conclusion is that most of the individuals who were not 
matched were not matched due to mismatches in addresses or names 
between the PACE company data and the credit reporting company data.
---------------------------------------------------------------------------

    \253\ See Nat'l Assoc. of Realtors, Highlights from the Profile 
of Home Buyers and Sellers, https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers (showing 80% of home purchases funded by a 
mortgage in 2023).
    \254\ See e.g., FICO, More than 232 Million U.S. Consumers Can 
Be Scored by the FICO Score Suite, FICO Blog (Aug. 2021), https://www.fico.com/blogs/more-232-million-us-consumers-can-be-scored-fico-score-suite.
---------------------------------------------------------------------------

    The CFPB acknowledges that, as some commenters asserted, the Static 
model in the PACE Report, which was cited for the main estimates in the 
proposal's 1022(b) analysis and again below, omits consumers who do not 
have sufficient data before and after their PACE loans were originated. 
Although this inevitably reduces the sample size somewhat,\255\ there 
is no reason to believe that the consumers who were excluded due to a 
lack of sufficient data before or after the PACE origination are 
dissimilar to those who were included. In particular, the Dynamic model 
from the PACE Report generally includes all consumers regardless of 
whether they have full data before and after the PACE origination and 
finds substantively similar estimates to the Static model.
---------------------------------------------------------------------------

    \255\ See PACE Report, supra note 12 at 53.
---------------------------------------------------------------------------

    A PACE company commenter criticized the fact that the CFPB's data 
request asked for a single application approval date for the PACE loan. 
The commenter stated that this date definition was ambiguous because it 
could be the date the financing agreement was executed or the date the 
contractor and property owner received the notice to proceed, among 
other possibilities. The commenter asserted that PACE companies 
interpreted this date in inconsistent ways, and that the PACE Report 
may have incorrectly counted some applications as not going forward 
when the recorded assessment may just be missing.
    The CFPB acknowledges the challenges that commenters raised with 
defining relevant dates in its PACE data collection but disagrees that 
this undermines the conclusions of the PACE Report. The CFPB consulted 
at length with PACE companies, including the commenter who expressed 
concerns with the date specifications, prior to issuing its data 
request. Given the inherent challenges of issuing a single, 
standardized data request to multiple private companies, the CFPB's 
voluntary data collection was reasonably specific with respect to 
identifying date specifications. Further, the PACE Report includes 
robustness analysis using alternate date definitions, which yielded 
substantively similar results.
    One PACE company asserted that the PACE Report's treatment of the 
date when PACE payments are due was improper, making the findings of 
the Report invalid. In the PACE Report, the CFPB described that the 
``treatment'' by

[[Page 2480]]

a PACE loan occurs when the first PACE payment was due or would have 
been due. The commenter stated that, because Application-Only Consumers 
did not obtain PACE financing, the CFPB should not refer to the period 
after the first PACE payment would have been due for these consumers as 
the post-treatment period, because they did not receive a PACE loan and 
thus experienced no ``treatment.'' The commenter further stated that 
any delinquencies associated with non-PACE alternative financing for 
Application-Only consumers would be included in the pre-treatment 
period, biasing the PACE Report's estimates of the effect of PACE loans 
on consumer financial outcomes towards zero.
    The CFPB does not agree with some commenters' assertion that the 
imprecision in the dates used in the PACE Report invalidates the 
results of the Report. If anything, measurement error of this nature 
would increase the likelihood of finding no impact of PACE loans on 
consumer financial outcomes. In general, measurement error in a 
regression analysis such as the one in the PACE Report would tend to 
bias results towards zero, that is, toward finding that PACE loans have 
no impact on consumer financial outcomes. This is not what is found in 
the PACE Report.
    One PACE company expressed concern that the PACE Report includes 
PACE loans with a performance window during the COVID-19 pandemic. The 
commenter asserted that the pandemic impacted credit performance 
outcomes for many Americans. The commenter also asserted that, during 
this time, mortgages and student loans were subject to forbearance 
programs, and that forbearance was also available for some property tax 
payments. The commenter also stated that there is not a methodological 
strategy that would have allowed the authors of the PACE Report to 
disentangle the impact of the pandemic from the impact of PACE loans on 
consumers' financial outcomes.
    The CFPB does not agree with commenters that the use of information 
during the COVID-19 pandemic undermines the conclusions of the Report 
that were relied on in the proposal and in this final rule. Despite 
widespread economic disruption during the pandemic, mortgage 
delinquency rates fell during the early days of the pandemic and 
remained low for years.\256\ This was due in part to assistance and 
forbearance programs such as those issued under the CARES Act enacted 
by Congress in March 2020.\257\ With mortgage delinquency rates 
suppressed generally for all consumers during the pandemic, if 
anything, the CFPB would expect the gap in mortgage delinquency rates 
between PACE consumers and Application-Only Consumers to be compressed 
during this period, leading to a smaller estimated effect of PACE on 
primary mortgage delinquency during the study period compared to pre-
pandemic, independent of the true average impact of PACE loans on 
consumers' finances. Indeed, although the PACE Report documents that 
PACE loans had a smaller impact on mortgage delinquency for loans 
originated after 2018, a point cited by several industry commenters, it 
is precisely these loans that were potentially impacted by the COVID-19 
pandemic. The reduced impact of PACE loans on mortgage delinquency 
during this period may be due in part to the overall reduction in 
mortgage delinquency due to pandemic assistance and forbearance 
programs.
---------------------------------------------------------------------------

    \256\ See e.g., Ryan Sandler & Judith Ricks, The Early Effects 
of the COVID-19 Pandemic on Consumer Credit, Off. of Rsch. Issue 
Brief, CFPB (Aug. 2020), https://files.consumerfinance.gov/f/documents/cfpb_early-effects-covid-19-consumer-credit_issue-brief.pdf (showing the reported rate of new delinquencies on 
mortgage loan accounts fell between March 2020 and June 2020, after 
being flat or increasing gradually for the year prior.); Lisa J. 
Dettling & Lauren Lambie-Hanson, Why is the Default Rate So Low? How 
Economic Conditions and Public Policies Have Shaped Mortgage and 
Auto Delinquencies During the COVID-19 Pandemic, FEDS Notes, Bd. of 
Governors of the Fed. Rsrv. Sys. (Mar. 4, 2021), https://doi.org/10.17016/2380-7172.2854 (showing mortgage delinquencies fell 
throughout the pandemic); Ryan Sandler, Delinquencies on Credit 
Accounts Continue to be Low Despite the Pandemic, CFPB (June 16, 
2021), https://www.consumerfinance.gov/about-us/blog/delinquencies-on-credit-accounts-continue-to-be-low-despite-the-pandemic/ (showing 
new delinquencies on mortgages remained low from July 2020 through 
April 2021); Ctr. for Microeconomic Data, Quarterly Report on 
Household Debt and Credit 2024, Fed. Rsrv. Bank of NY Rsch. & Stat. 
Grp. (Nov. 2024), https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2024Q3 (showing that 
transitions into serious delinquency for mortgages were historically 
low compared to 2009 through early 2024, nationally and in Texas and 
California).
    \257\ See Coronavirus Aid, Relief, and Economic Security Act, 
Public Law 116-136 (Mar. 27, 2020) https://www.congress.gov/bill/116th-congress/house-bill/748/text (CARES Act).
---------------------------------------------------------------------------

    Commenters generally did not provide additional data or studies 
about the benefits and costs of the proposed rule, with one notable 
exception. A PACE industry trade association obtained the same data as 
was used in the PACE Report from the consumer reporting agency that 
served as the CFPB's contractor. The trade association conducted 
analysis of the data. The results of this analysis are described in a 
comment from the trade association itself, as well as in comments from 
individual PACE companies. The CFPB refers to the data and analysis in 
these comments collectively as ``the Trade Group Analysis.'' The Trade 
Group Analysis did not include a formal regression analysis to control 
for other factors, such as a difference-in-differences analysis as used 
in the PACE Report and did not report any measures of statistical 
precision. Instead, the Trade Group Analysis claims to compare the raw 
average rates of non-PACE mortgage delinquency across different groups, 
using different comparison groups and sample choices than were used in 
the PACE Report, as described below.
    The Trade Group Analysis compared outcomes between Originated 
Consumers (nominally as defined in the PACE Report) and an alternate 
control group, a subset of Application-Only Consumers who took out a 
secured loan after applying for the PACE loan and whose non-PACE 
mortgage payment increased by at least $1,000 after applying for the 
PACE loan.\258\ The analysis was further limited to applications for 
both groups that were received between July 2018 and December 2018. The 
proposed control group consisted of 312 homeowners. The Trade Group 
Analysis found that homeowners who received PACE financing had better 
outcomes than the control group. For example, three years after the 
expected loan origination date, the 90-day mortgage delinquency rate 
was 5.3 percentage points higher for the alternate control group than 
for Originated Consumers.
---------------------------------------------------------------------------

    \258\ The Trade Group Analysis uses alternate terms for the 
relevant groups of PACE consumers than the terms Originated 
Consumers and Application-Only Consumers used in the PACE Report. To 
avoid confusion, the CFPB in this discussion refers to the groups 
that are comparable to those used in the PACE Report using the terms 
from the Report, and the alternate groups suggested by the 
commenters as alternate control groups.
---------------------------------------------------------------------------

    The Trade Group Analysis also presented results based on a control 
group it refers to as ``Standard Financing'' consumers, which it 
described as a group of consumers who resided in the same ZIP code as 
an Originated Consumer and took on between $15,000 and $40,000 of debt 
from a company that ``typically provides home improvement financing,'' 
between July 2018 and June 2019. The types of debt for the control 
group included a mix of credit types, including credit cards, second 
mortgages, and home improvement loans. The comparison shows these 
Standard Financing consumers performing worse on several delinquency 
outcomes and on credit score compared to Originated

[[Page 2481]]

Consumers and Application-Only Consumers.
    The Trade Group Analysis includes data for the period after a PACE 
loan is originated but before payments become due. The Trade Group 
Analysis finds that including this window shows improved credit 
performance for Originated Consumers compared to Application-Only 
Consumers. Commenters note that consumers may be receiving benefits 
from the PACE home improvement during this period even though they are 
not yet making PACE loan payments. One commenter asserted that omitting 
repayment data from the year following the PACE loan origination date 
accounts for about half of the difference in the mortgage delinquency 
rate between the PACE homeowners and the Application-Only homeowners.
    Finally, the Trade Group Analysis reported data on consumer credit 
scores. The Trade Group Analysis found that the average credit score 
for Originated Consumers who applied for a PACE loan from the second 
half of June 2019 through June 2020 increased 1.25 points more than the 
average for Application-Only Consumers over a three-year period. A PACE 
company stated that the improving trend in outcomes over time deserved 
additional analysis and that relying on earlier data is misleading. The 
commenter stated that the improvement in credit scores from 2019 to 
2020 should be examined further to confirm that the trend continued 
through 2021 and into the future. As with the analysis of delinquency 
outcomes, the Trade Group Analysis does not conduct any statistical 
analysis to account for variation in other factors, but rather simply 
compares averages for the different groups, without reporting sample 
sizes or measures of statistical precision.
    The CFPB does not agree that the alternate control groups suggested 
in the Trade Group Analysis are informative about the effect of PACE 
loans on consumer financial outcomes. At the outset, the CFPB notes 
that the goal for choosing a control group for a difference-in-
differences analysis is to find a group that will capture the 
counterfactual. That is, the control group should capture how outcomes 
would have changed for the treated group had they not been treated. It 
is reasonable to expect that Application-Only Consumers would capture 
that counterfactual trend for Originated Consumers--consumers in both 
groups were approached by a home improvement contractor marketing the 
PACE loan, agreed to apply for a PACE loan, and were approved for a 
PACE loan. The PACE Report includes analysis supporting the assumption 
that these two groups had similar trends in their financial outcomes 
prior to applying for a PACE loan. In addition, the CFPB reiterates 
that the relevant quantity for purposes of this rule is the overall 
effect of PACE loans, including the way they are marketed and the fact 
that they may induce consumers into undertaking a home improvement 
project in the first place, or into financing a project that they might 
otherwise pay cash for.
    Additionally, the CFPB notes that the alternate control groups 
suggested by the Trade Group Analysis are aimed at limiting attention 
to consumers who have chosen to finance a home improvement project. 
While in principle this might be an appropriate strategy to disentangle 
the effects of PACE marketing from the unique features of the loans, 
that will not identify the overall impact of PACE loans on consumer 
financial outcomes, which is the relevant issue for the CFPB.
    With respect to the Trade Group Analysis's approach to use only 
Application-Only consumers whose mortgage payments increased 
significantly, the CFPB notes that this subsample is small and highly 
selected. As the commenter notes, this control group contains only 312 
consumers--compared to 46,906 in the full Application-Only group. This 
suggested control group is too small to have statistical power 
necessary to draw conclusions about the effect of PACE on consumer 
financial outcomes, even if the commenter had conducted a full 
regression analysis.\259\ Furthermore, again, this alternate control 
group would not capture the overall effect of PACE transactions on 
consumers' financial outcomes, which the CFPB finds to be the relevant 
issue here.
---------------------------------------------------------------------------

    \259\ Although the commenter did not supply confidence bands or 
other measures of statistical precision, some arithmetic shows that 
there was no reasonable expectation that a sample size of 312 would 
be sufficient. For example, the PACE Report estimates that PACE 
loans increased non-PACE mortgage delinquency by 2.5 percentage 
points, with a standard error of 0.00234. A 95 percent confidence 
interval includes values within about 2 standard errors above and 
below the central estimate. The PACE Report's estimates were based 
on 46,906 observations in the control group, 150 times larger than 
the alternate group offered by the commenter. Standard errors scale 
with the square root of sample size, such that, as a first 
approximation, we would expect standard errors about 12 times larger 
for the commenter's estimate compared to those in the PACE Report, 
and a 95 percent confidence interval for a sample size of 312 would 
likely cover more than 6 percentage points on either side of a 
central estimate.
---------------------------------------------------------------------------

    The ``standard financing'' control group is also problematic. The 
statistics provided by the commenters show that this control group was 
very different from Originated Consumers along several key dimensions, 
including credit score and delinquency rate prior to origination. For 
instance, within the subsample of PACE applications that the Trade 
Group Analysis chose to focus on, the average non-PACE mortgage 
delinquency rates for Originated Consumers and Application-Only 
Consumers prior to their PACE application was about 7 percent for both 
groups. The ``standard financing'' group had a delinquency rate of just 
0.61 percent.\260\ The Trade Group Analysis even notes that this 
control group had much higher credit scores than PACE borrowers. The 
commenters asserted that this is to be expected given that standard 
financing companies primarily market to higher-credit score 
individuals; however, this is precisely why the standard financing 
group is not a reasonable control group.
---------------------------------------------------------------------------

    \260\ The delinquency rates for the ``standard financing'' group 
are so low, in fact, that the CFPB questions whether they were 
calculated in a way that is comparable to the rates for PACE 
applicants. The Trade Group Analysis describes that data on the 
``standard financing'' group as aggregated statistics provided by 
the credit reporting company, rather than account-level information 
as in the data obtained by the CFPB and nominally used for the other 
groups in the Trade Group Analysis. It is not clear from the 
comments whether the credit reporting company necessarily calculated 
aggregated delinquency rates in the same way as in the PACE Report, 
or the same way as the Trade Group Analysis did for other groups.
---------------------------------------------------------------------------

    The CFPB notes that the PACE Report does analyze the effect of PACE 
loans in more recent years and continued to find that PACE loans 
increase non-mortgage delinquency. The CFPB also notes that due to the 
payment structure of PACE loans, it is impossible to fully evaluate 
affordability without a lag of several years. As discussed above, PACE 
loans may have a delay of up to a year and a half between origination 
and the due date of the first property tax bill that includes the PACE 
transaction. Because property taxes are typically billed annually or 
semi-annually, it is difficult to evaluate affordability without 
considering a period of at least two years after payments begin, as 
even a period of this length includes only two or possibly four 
payments. As a result, a methodology similar to what was done in the 
Static Model of the PACE Report--requiring three years of non-PACE 
mortgage payment information after the origination of the PACE loan--is 
necessary. This means that even if the CFPB could gather and analyze 
additional data on more recent PACE loans with no delay, it would not 
be feasible to study the affordability of PACE loans originated after 
around 2021. Given that gathering and

[[Page 2482]]

analyzing data is not an instantaneous process, the data considered in 
the PACE Report, including PACE loans originated through 2019, is as 
timely as is reasonably feasible.
    For the reasons described above, the CFPB continues to rely on the 
PACE Report, among other sources, as the basis for the CFPB's 
consideration of the likely impacts of this final rule.

D. Potential Benefits and Costs to Consumers and Covered Persons

    This section discusses the benefits and costs to consumers and 
covered persons of the two main groups of provisions discussed above: 
the ability-to-repay provisions, and the clarification that only 
involuntary tax liens and involuntary tax assessments are excluded from 
being treated as credit under TILA.
Potential Benefits and Costs to Consumers and Covered Persons From the 
Ability-To-Repay Provisions
    The final rule amends Sec.  1026.43, which generally requires an 
ability-to-repay analysis before originating a mortgage loan, to 
explicitly include PACE transactions, with several adjustments for the 
unique nature of PACE. The rule also provides that a PACE transaction 
is not a qualified mortgage as defined in Sec.  1026.43.
    Although the CFPB uses the overall estimates of the effect of PACE 
loans on consumer financial outcomes from the PACE Report to illustrate 
possible aggregate benefits and costs of the ability-to-repay 
provisions of the rule, the CFPB notes that both benefits and costs may 
differ due to the changes in State laws in recent years. Both 
California and Florida now require PACE companies to verify income 
before making a PACE loan, such that this final rule may have less 
impact than might be expected in a world where PACE companies did not 
always verify prospective borrowers' income, as was the case prior to 
2018 in California and prior to 2024 in Florida. It is unclear to what 
extent the impacts of these State laws replicate the impacts of the 
protections included in this rule. In particular, Florida's recent 
statute only requires that annual PACE loan payments be less than 10 
percent of annual household income.\261\ Data from the PACE Report 
suggests that PACE loans with payments above this threshold are rare, 
such that consumers would rarely have an application for a PACE loan 
denied due to Florida's income requirement.\262\ However, merely 
verifying income may have benefits and costs. The final rule generally 
will not create benefits or costs related to verifying income, as this 
is now required at baseline under State laws in States where PACE is 
most active.
---------------------------------------------------------------------------

    \261\ See Fla. Stat. sec. 163.081(3)(a)(12).
    \262\ See PACE Report, supra note 12, at Table 2 (showing that 
75% of PACE loans had annual payments of less than $3,300, while 75% 
of PACE borrowers with reported income had annual income above 
$54,000, such that even a relatively high payment for a relatively 
low-income PACE loan borrower would be well under 10% of income).
---------------------------------------------------------------------------

Potential Benefits and Costs to Consumers of the Ability-To-Repay 
Provisions
Benefits of Reducing Non-PACE Mortgage Delinquency Caused by 
Unaffordable PACE Transactions
    Under the final rule, consumers who are not found to have a 
reasonable ability to repay the loan would not be able to obtain a PACE 
loan. In general, the CFPB expects that consumers who will be denied 
PACE transactions due to the required ability-to-repay determination 
would otherwise struggle to repay the cost of the PACE transaction. 
These consumers generally will benefit from the rule.
    The evidence in the PACE Report helps to partially quantify the 
potential benefits to consumers who cannot afford a PACE transaction. 
The difference-in-differences estimation in the Report finds that, for 
consumers with a pre-existing non-PACE mortgage, entering into a PACE 
transaction increases the probability of becoming 60-days delinquent on 
the pre-existing mortgage by 2.5 percentage points in the two years 
following the first due date for a tax bill including the PACE 
transaction.\263\
---------------------------------------------------------------------------

    \263\ Id.
---------------------------------------------------------------------------

    Two PACE companies characterized the estimated effect of a PACE 
loan on non-PACE mortgage delinquency from the PACE Report as small. 
These commenters also stated that the CFPB's estimate was not 
meaningful, because the PACE Report shows the effect of PACE loans on 
non-PACE mortgage delinquency was short-lived, with non-PACE 
delinquency increasing immediately after PACE payments become due, and 
gradually returning to normal over the subsequent 24 months.
    The CFPB does not agree with the commenter's characterization of 
the effect of a PACE transaction on mortgage delinquency being small. 
The PACE Report shows that the baseline rate of mortgage delinquency 
among PACE borrowers in the two years prior to receiving a PACE loan 
was 7.2 percent, such that the PACE loan increased the risk of 
delinquency by 35 percent relative to that baseline. With respect to 
the PACE Report finding impacts of PACE loans on delinquency primarily 
early in the term of the loans, the CFPB notes that delinquency early 
in the term of a loan is a more direct signal of the affordability of 
the loan than later delinquency.\264\
---------------------------------------------------------------------------

    \264\ See 85 FR 86308, 86317 (Dec. 29, 2020).
---------------------------------------------------------------------------

    PACE industry stakeholders also expressed skepticism about the 
CFPB's estimated effect of PACE loans on non-PACE mortgage delinquency 
generally, citing instead data on property tax delinquencies. 
Specifically, a PACE company cited a report by a bond rating agency 
suggesting a delinquency rate of 3 to 4 percent on PACE loans, while a 
special assessment administrator stated that properties with PACE loans 
it managed experienced a property tax delinquency rate of 2 to 3 
percent.
    Industry commenters' characterization of property tax delinquency 
rates of PACE borrowers is problematic. As discussed above, property 
tax payments are paid by mortgage servicers for consumers who have a 
mortgage with an escrow account, and even for mortgages without a pre-
existing escrow account, servicers will generally establish an escrow 
account to pay an otherwise delinquent property tax bill. As a result, 
a property tax delinquency would generally only manifest in the data 
cited by commenters if the borrower does not have a mortgage. This 
means that the true share of consumers who are unable to afford a PACE 
loan is likely significantly higher than the 2 to 4 percent property 
tax delinquency rate cited by the commenters. Moreover, a local 
government commenter that runs its own PACE program asserted that its 
loans had a tax delinquency rate of around 0.5 percent, suggesting that 
privately-run PACE programs have significantly higher tax delinquency 
rates than could be explained by unrelated shocks to consumers' income 
or expenses.
    Additional evidence from the PACE Report indicates that requiring 
an ability-to-repay analysis could improve outcomes specifically for 
consumers who would otherwise struggle to repay the PACE transaction. 
The PACE Report finds that the effect of a PACE transaction on mortgage 
delinquency is higher for consumers with lower credit scores. The 
average effect of a 2.5 percentage point increase in the rate of non-
PACE mortgage delinquency over a two-year period is composed of a 0.3 
percentage point increase for consumers

[[Page 2483]]

with super-prime credit scores (11.1 percent of all PACE borrowers), a 
1.7 percentage point increase for consumers with prime credit scores 
(42 percent of all PACE borrowers), a 3.8 percentage point increase for 
consumers with near-prime credit scores (23.4 percent of all PACE 
borrowers), and a 6.2 percentage point increase for consumers with 
subprime credit scores (20.4 percent of all PACE borrowers).\265\ The 
consumers with subprime credit scores would be the most likely to be 
excluded by the ability-to-repay analysis that the final rule requires. 
Credit score tends to be correlated with income. Moreover, credit 
scores are based on credit history, and the ability-to-repay 
requirements in the final rule require consideration of credit history.
---------------------------------------------------------------------------

    \265\ Id. at Figure 10.
---------------------------------------------------------------------------

    A PACE company stated that the PACE Report's finding of larger 
impacts for borrowers with sub-prime credit scores had no bearing on 
the affordability of PACE loans. The commenter asserted that consumers 
with sub-prime credit scores are inherently more likely to default on a 
non-PACE mortgage, regardless of whether they take up a PACE loan, such 
that larger increases in delinquency for this group are not related to 
the specific effect of PACE loans on that group.
    The CFPB also does not agree that the higher delinquency risk of 
low-credit score individuals invalidates the results for that subgroup 
reported in the PACE Report. The subgroup analyses in the PACE Report 
were limited to members of each subgroup in both the Originated 
Consumers and Application-Only Consumer groups. This means that low-
credit score individuals are compared to other low-credit score 
individuals, with a similarly high underlying risk of mortgage default. 
The fact that Originated Consumers with lower credit scores saw a 
larger increase in delinquency than Originated Consumers with higher 
credit scores is thus relevant to demonstrate that lower credit score 
individuals may be more negatively impacted by PACE transactions.
    The evidence from the PACE Report also suggests that collecting 
income information from potential PACE borrowers can lead to better 
outcomes. The evidence is less direct on this point because PACE 
companies did not collect income information from a large majority of 
applicants during the period studied by the Report. For example, the 
Report indicates PACE companies collected income information from less 
than 24 percent of originated borrowers in California prior to April 
2018, and a little more than 10 percent of originated borrowers in 
Florida during that time.\266\ Income information was primarily 
available in the data used in the Report for consumers in California 
after April 2018. After this point, the Report finds that essentially 
all originated borrowers in California had income information 
collected, likely because the 2018 California PACE Reforms required 
consideration of income by PACE companies as part of an analysis that 
considered consumers' ability to pay the PACE loan. As a result, the 
PACE Report's analysis of income is largely based on consumers whose 
PACE transactions were originated under requirements that resemble this 
final rule's ability-to-repay requirements in some respects.
---------------------------------------------------------------------------

    \266\ Id. at Table 1.
---------------------------------------------------------------------------

    The PACE Report finds that PACE transactions increase non-PACE 
mortgage delinquency less for consumers where the PACE company 
collected income information.\267\ The Report also finds that PACE 
transactions increased non-PACE mortgage delinquency rates more for 
consumers in California before the 2018 California PACE Reforms, 
compared to consumers in California after 2018, with the effect falling 
by almost two-thirds after the 2018 California PACE Reforms required 
consideration of income by PACE companies, from a 3.9 percentage point 
increase to a 1.5 percentage point increase.\268\ However, the Report 
also finds that the effect of PACE transactions on mortgage delinquency 
decreased somewhat in Florida as well around 2018, which suggests the 
change could be in part the result of other nationwide trends, rather 
than solely the requirements of the 2018 California PACE Reforms.\269\ 
The PACE Report is inconclusive with respect to whether income or a 
calculation of DTI predicted negative effects of PACE transactions on 
financial outcomes, because income information was not available for 
enough consumers to draw statistically reliable conclusions about 
subgroups of the population with income information.\270\
---------------------------------------------------------------------------

    \267\ Id.at 45.
    \268\ Id. at 46.
    \269\ Id. at 46-47.
    \270\ Id. at 47-48.
---------------------------------------------------------------------------

    One PACE company took issue with the CFPB's finding in the 
1022(b)(2)(A) analysis of the proposal that collecting income 
information from potential PACE borrowers could lead to better 
outcomes. The CFPB's discussion of this subject was based on the PACE 
Report's finding that PACE outcomes improved in California relative to 
borrowers in Florida after the implementation of the California PACE 
Reforms. The commenter stated that the PACE Report's analyses of the 
2018 California PACE Reforms were not valid, as the Report considered 
only the first effective date of the statutes collectively referred to 
as ``the 2018 California PACE Reforms,'' ignoring the effective dates 
of statutes that became effective later in 2018. The commenter also 
stated that the CFPB did not account for the fact that the 2018 
California PACE Reforms were endogenous--that is, that the laws were 
not implemented in California by chance, such that other unrelated 
factors may have contributed to both the implementation of the 2018 
California PACE Reforms and any subsequent changes in PACE lending in 
California.
    The CFPB reiterates, as it said in the proposal and again in this 
final rule, that this analysis was suggestive rather than causal. The 
CFPB agrees that the 2018 California PACE Reforms may not constitute an 
exogenous, natural experiment, and that the measured changes in the 
effect of PACE loans in California on consumers following the 
implementation of those statutes may not reflect the causal impact of 
the laws. However, the PACE Report's use of the 2018 California PACE 
Reforms as a benchmark to inform the potential impact of requiring the 
collection of income information remains appropriate to inform the 
CFPB's analysis of benefits, costs and impacts of this final rule.
    In addition, the CFPB does not agree that the variety of 
implementation dates of the 2018 California PACE Reforms was material 
to the analysis in the PACE Report. First, the difference is a matter 
of months, such that most PACE loans that were considered to be subject 
to the 2018 California PACE Reforms in the PACE Report were originated 
after all of the component statutes were in place. Further, by using 
the first implementation date as the date of ``treatment'' by the State 
laws, one would expect later laws contributing to the overall effect to 
bias the effect of the Reforms toward zero (as some loans originated in 
2018 were in fact only partially treated, but were considered in the 
analysis to be fully treated, potentially lowering the estimated 
impact).
    The facts documented by the PACE Report, described above, indicate 
that the ability-to-repay provisions in this final rule will likely 
prevent some consumers who cannot afford a PACE transaction from 
entering into a PACE transaction and suffering negative consequences as 
a result of that transaction.

[[Page 2484]]

Quantifying Aggregate Benefits of Preventing Unaffordable PACE 
Transactions
    Consumers who become delinquent on their mortgages will, at a 
minimum, incur late fees on their payments. If a PACE transaction 
causes a borrower to be in delinquency for a longer period of time, the 
consequences could include foreclosure or a tax sale. Consumers' credit 
scores could also be affected, although the PACE Report finds only 
small impacts of PACE transactions on credit scores--perhaps in part 
because PACE borrowers tended to already have relatively low credit 
scores prior to the PACE transaction. The CFPB quantifies the 
individual and aggregate monetary benefits of avoiding these consumer 
harms below to the extent possible given the data available to the CFPB 
from the PACE Report, information provided by commenters, and other 
data sources. The CFPB uses the estimates from the PACE Report of the 
average effect of PACE transactions on consumer financial outcomes to 
estimate these benefits but notes that these estimates likely overstate 
aggregate benefits to the extent that State laws already protect 
consumers from some unaffordable PACE transactions.
    The PACE Report finds that the average monthly mortgage payment for 
consumers with PACE transactions originated between 2014 and 2019 was 
$1,877.\271\ Assuming a late fee of 5 percent, avoiding a PACE 
transaction would save the average PACE consumer who experiences a 60-
day mortgage delinquency at least $188 over a two-year period. The 
average benefit to such consumers would likely be higher, as many would 
likely have more than a single 60-day mortgage delinquency caused by 
the PACE transaction.
---------------------------------------------------------------------------

    \271\ Id. at 16.
---------------------------------------------------------------------------

    Two PACE companies stated that the CFPB's estimate of late fee 
costs related to PACE loan-induced delinquencies in the proposal was 
not significant and that this generally indicated that the benefits to 
consumers of preventing non-PACE mortgage delinquencies due to PACE 
transactions were limited. However, the CFPB did not assert that this 
was the only cost of potentially unaffordable PACE loans, only that it 
was a cost that can be readily quantified. The CFPB discusses other 
potential costs, including from potential foreclosures, in the proposal 
and below in this final rule.
    Foreclosure is extremely costly, both to the consumer who 
experiences foreclosure and to society at large. In its 2021 RESPA 
Mortgage Servicing Rule, the CFPB conservatively assumed the cost of a 
foreclosure was $30,100 in 2021 dollars, consisting of both the up-
front cost to the foreclosed consumer and the resulting decrease in 
property values for their neighbors, but no other pecuniary or non-
pecuniary costs.\272\ The CFPB adopts the same assumption here with an 
adjustment for inflation, noting as it did in the 2021 rule that it is 
likely an underestimate of the average benefit to preventing 
foreclosure. Adjusting for inflation to 2024 dollars, the benefit of an 
avoided foreclosure is at least $35,538.
---------------------------------------------------------------------------

    \272\ See 86 FR 34889 (June 30, 2021).
---------------------------------------------------------------------------

    The CFPB does not have data available to estimate the benefits to 
consumers of preventing a reduction in credit score but notes again 
that the PACE Report finds that PACE transactions only lower scores by 
an average of about one point.\273\ This small effect on credit scores 
likely combines large reductions in scores for consumers who became 
delinquent on their non-PACE mortgages with zero or positive effects 
for consumers who are able to afford PACE loans; regardless, this 
suggests that the aggregate benefits from credit score changes would be 
negligible in magnitude.
---------------------------------------------------------------------------

    \273\ See PACE Report, supra note 12, at 41.
---------------------------------------------------------------------------

    Two PACE companies stated that credit score is a key measure of 
consumers' financial health, and further stated because the PACE Report 
does not find evidence of an effect of PACE loans on PACE borrowers' 
credit scores, this means that PACE loans are not harmful, or else that 
the methodology of the PACE Report is flawed.
    The CFPB does not agree with the assessment that credit score is 
the only outcome that matters for consumers, such that the lack of an 
average credit score impact means that PACE loans under the baseline 
impose no costs on consumers. Credit scores can be a useful measure of 
credit health but are not the only measure of potential impacts to 
consumers. The PACE Report documents impacts that lead to significant 
costs to consumers, such as mortgage delinquency, independent of any 
changes in average credit scores. Further, the PACE Report documents 
that PACE borrowers tended to have relatively low credit scores on 
average. The credit scores of individuals with lower scores are often 
relatively insensitive to marginal negative information such as an 
additional delinquency. The CFPB also does not agree that the lack of 
an effect on average credit scores combined with increased mortgage 
delinquency indicates a problem with the methodology of the PACE 
Report, as a commenter suggested. While the CFPB views the increase in 
non-PACE mortgage delinquency as significant and evidence that 
consumers have difficulty repaying PACE loans, the share of PACE 
consumers who experience negative credit outcomes is small enough in 
absolute size that the average change in credit score would be expected 
to be relatively small. Indeed, the estimated average effect of PACE 
loans on credit scores from the PACE Report is consistent with a large 
negative credit score effect for PACE consumers who became delinquent 
on a non-PACE mortgage due to the PACE loan. Specifically, the PACE 
Report estimates that a PACE loan reduces consumers' credit scores by 
an average of 1.65 points, with a 95 percent confidence interval 
spanning from 0.98 to 2.32 points. If this change in credit scores were 
concentrated in the 2.5 percent of Originated Consumers for whom PACE 
loans caused a 60-day mortgage delinquency, with no average effect on 
the credit scores of other consumers, that would mean the affected 
consumers would have credit scores reduced by an average of about 65 
points. While the effect of a mortgage delinquency on credit scores 
depends on a number of factors, including the rest of the consumer's 
credit history, the CFPB finds this is a plausible effect size. As 
such, the small overall average effect of PACE loans on Originated 
Consumers' credit scores does not suggest problems with the methodology 
of the PACE Report.
    In 2019, the last full year of data studied in the PACE Report, the 
four PACE companies whose data were included in the Report originated 
about 2,000 PACE transactions per month, for a total of about 24,000 
per year.\274\ For the 71.1 percent of such borrowers with a pre-
existing non-PACE mortgage,\275\ a 2.5 percentage point increase in 
mortgage delinquency would mean about 600 consumers per year struggling 
to pay the cost of their PACE transaction and incurring at least a 60-
day delinquency. Most loans that become delinquent do not end with a 
foreclosure sale.\276\ The PACE Report

[[Page 2485]]

finds that PACE transactions increase the probability of a foreclosure 
by 0.5 percentage points over a two-year period.\277\
---------------------------------------------------------------------------

    \274\ Id. at Figure 16.
    \275\ Id. at 18.
    \276\ Because of generally favorable conditions in both the 
housing market and the non-PACE mortgage market in recent years, 
PACE borrowers may have been more able to avoid foreclosure by 
either selling or refinancing their homes, compared to the non-PACE 
mortgage borrowers studied in the CFPB's 2013 RESPA Servicing Rule 
Assessment Report using earlier data. Indeed, the PACE Report finds 
that PACE loans increased the probability of a consumer closing a 
mortgage (indicating some kind of prepayment), with no increase in 
new mortgages, suggesting a subset of PACE borrowers may have been 
induced to sell their homes. Although they would avoid the cost of 
foreclosure by doing so, moving is also expensive, with real estate 
agents' fees alone representing typically 5 to 6 percent of the 
home's value, in addition to other closing costs and the costs 
related to moving. See CFPB, 2013 RESPA Servicing Rule Assessment 
Report (Jan. 2019), https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing-rule-assessment_report.pdf.
    \277\ See PACE Report, supra note 12, at 33. The PACE Report 
notes that the credit record data used in the PACE Report are 
limited with respect to measuring foreclosures. Nonetheless, the 
size of this effect relative to the Report's estimate of the effect 
of PACE transactions on 60-day delinquencies is consistent with 
prior CFPB research on the share of 60-day delinquencies that end in 
a foreclosure. The CFPB's 2013 RESPA Servicing Rule Assessment 
Report found that, for a range of loans that became 90-days 
delinquent from 2005 to 2014, approximately 18 to 35 percent ended 
in a foreclosure sale within three years of the initial delinquency. 
Focusing on loans that become 60-days delinquent, the same report 
found that, 18 months after an initial 60-day delinquency, between 
eight and 18 percent of loans had ended in foreclosure sale over the 
period 2001 to 2016. See CFPB, 2013 RESPA Servicing Rule Assessment 
Report (Jan. 2019), https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing-rule-assessment_report.pdf.
---------------------------------------------------------------------------

    Assuming that 0.5 percent of consumers who engage in a PACE 
transaction will ultimately experience foreclosure as a result of the 
PACE transaction, this final rule could prevent about 120 foreclosures 
per year, for an aggregate annual benefit to consumers of about $4.2 
million per year. If the rule were to prevent a minimum of two months 
of late fees for each of the 600 consumers who would otherwise become 
60-days delinquent as a result of a PACE transaction, that would result 
in additional aggregate benefits of at least $112,000 per year.
    Multiple PACE industry commenters disagreed with the CFPB's 
assessment of the potential impacts of the rule on prevented 
foreclosures. Two PACE companies stated that the data in the PACE 
Report only capture initiated foreclosures, while not all foreclosures 
are completed. These commenters also cited an academic study of PACE 
using data from early in California's PACE program, which found a 
completed foreclosure rate on PACE-encumbered properties of about 0.5 
percent by 2015.\278\ A PACE industry trade association stated that it 
would be impossible for the proposed rule to prevent 120 foreclosures 
per year as the proposed 1022(b) analysis projected, because in 
California there had only been seven foreclosures of PACE-encumbered 
properties since 2019; the commenter did not cite any source for this 
statistic. In addition, one PACE company stated that the statewide 
foreclosure rates for California and Florida were similar to the 
national average, demonstrating that PACE loans do not cause a large 
number of foreclosures. The same commenter also stated that the PACE 
Loss Reserve Program in California, established to compensate non-PACE 
mortgage holders for losses related to foreclosures on properties with 
PACE loans, had no claims between 2014 and 2020 and only two claims 
between 2020 and 2023. The commenter further stated that this meant 
that PACE loans do not contribute to default on non-PACE mortgages.
---------------------------------------------------------------------------

    \278\ Laurie S. Goodman & Jun Zhu, PACE Loans: Does Sale Value 
Reflect Improvements?, 21 The Journal of Structured Fin., no. 4 
(2016).
---------------------------------------------------------------------------

    The CFPB acknowledged above and in the proposal that the credit 
record data used in the PACE Report cannot reliably distinguish between 
initiated and completed foreclosures but notes that this does not mean 
the data are limited to initiated foreclosures. Indeed, as discussed 
above, the ratio of the PACE Report's estimated effect on foreclosures 
to the estimated effect on 60-day delinquency is consistent with other 
evidence on the share of 60-day delinquent mortgages that end in a 
foreclosure sale. In addition, the CFPB notes that even an initiated 
foreclosure that is not ultimately completed imposes significant costs 
on consumers, including fees, time costs, and distress, even if these 
costs are more difficult to quantify.
    The CFPB is not aware of the underlying data behind the statistic 
cited by the PACE industry trade association that there were only seven 
foreclosures in California on PACE-encumbered properties since 2019. 
However, it is not plausible that this is the total number of 
properties with a PACE loan that had a completed foreclosure in 
California since 2019. Even if PACE loans had no effect on the 
probability of foreclosure, a small percentage of consumers face 
foreclosure every year for reasons unrelated to PACE transactions, and 
this base rate alone should account for more than seven foreclosures. 
For instance, the PACE Report indicates that about 0.8 percent of 
Originated Consumers had at least one foreclosure in the two years 
prior to taking out a PACE loan.\279\ Even allowing that not all of 
these foreclosures would ultimately have been completed, this 
translates to at least a few hundred foreclosures in total. Unless PACE 
loans drastically decreased the rate of foreclosure, which would be 
inconsistent with the PACE Report's other findings on non-PACE mortgage 
delinquency, it is unlikely that there have been only 7 completed 
foreclosures over the past 5 years.\280\ It is possible that the 
commenter was referring to the number of completed tax foreclosures 
initiated by the taxing authority. A low rate of completed foreclosures 
initiated by the taxing authority would be consistent with other 
comments indicating that tax foreclosures are infrequent and take a 
considerable amount of time and the CFPB's conclusion discussed above 
that consumers struggling with paying a PACE loan will rarely default 
on the PACE loan payments themselves, but rather will become delinquent 
on their non-PACE mortgage. Because of this conclusion, the number of 
tax foreclosures does not reflect the potential benefits of the rule in 
preventing all types of foreclosures, nor does it reflect on the 
methodology of the PACE Report.
---------------------------------------------------------------------------

    \279\ See PACE Report, supra note 12, at Table 9.
    \280\ The CFPB also notes that the period following 2019 is a 
difficult time to study foreclosures as an outcome, as mortgage 
forbearance required by the CARES Act in 2020 and 2021 prevented 
many foreclosures from proceeding.
---------------------------------------------------------------------------

    The CFPB does not find the average foreclosure rates in California 
and Florida relative to the national average to be a relevant 
consideration as some commenters suggested. Given the relatively small 
scale of the PACE industry and the size of the effect of PACE loans on 
foreclosure estimated in the PACE Report, the CFPB would not expect 
PACE loans to measurably impact the foreclosure rate statewide. The 
CFPB also does not find the usage of the California PACE Loss Reserve 
Program to be a relevant consideration. Non-PACE mortgage-holders will 
only incur losses due to a PACE loan-related foreclosure if the 
foreclosed property has less equity than outstanding PACE payments at 
the foreclosure sale. The period from 2014 through the present 
represents a time of rising house prices in California, and moreover 
California State law imposed maximum combined loan-to-value ratios for 
PACE loans.\281\ As a result, it is unsurprising that foreclosures in 
California related to PACE loans would not result in claims on the PACE 
Loss Reserve Program.
---------------------------------------------------------------------------

    \281\ Cal. Fin. Code sec. 22684(h).
---------------------------------------------------------------------------

Other Benefits of Preventing Unaffordable PACE Loans
    In the proposal, the CFPB discussed the benefits to consumers 
implied by the finding from the PACE Report that credit card balances 
increased significantly for PACE borrowers who did not have a pre-
existing non-PACE

[[Page 2486]]

mortgage, compared to the change in balances for PACE applicants who 
did not receive a PACE loan and also did not have a pre-existing non-
PACE mortgage.\282\ As discussed above, the CFPB agrees with commenters 
that this finding is, at best, merely suggestive, as the PACE Report 
shows that, unlike the Report's estimates for mortgage delinquency, the 
estimates for credit card balances did not meet the required 
assumptions for a valid difference-in-differences analysis. While it is 
plausible that consumers who do not have a non-PACE mortgage will incur 
credit card debt as a result of an unaffordable PACE loan, the CFPB 
does not have a reliable estimate of whether or how much this will be 
prevented by this rule.
---------------------------------------------------------------------------

    \282\ See PACE Report, supra note 12, at 41.
---------------------------------------------------------------------------

    A PACE company opined that credit card delinquency would have been 
a more relevant outcome to study than non-PACE mortgage delinquency 
because consumers may prioritize mortgage payments over credit card 
payments. The commenter also noted that the PACE Report's analysis of 
credit card delinquency included more data than the analysis of 
mortgage delinquency, as the delinquency analysis for each type of 
credit studied in the Report was limited to consumers with the relevant 
type of credit prior to obtaining a PACE loan, and more consumers had 
credit cards than non-PACE mortgages. Separately, a PACE industry trade 
association stated that the CFPB's estimate of credit card interest 
savings was overstated because, if PACE loans were not available, 
consumers would pay for the same home improvement projects with a 
credit card instead, likely incurring significant interest charges as a 
result in the view of the commenter.
    The CFPB does not agree that credit card delinquency is a better or 
more central outcome to study than non-PACE mortgage delinquency. As 
discussed above, for the substantial majority of consumers with a pre-
existing non-PACE mortgage, failure to pay a PACE loan will manifest in 
the data as a mortgage delinquency. The PACE Report shows that PACE 
loans clearly increase non-PACE mortgage delinquency, with less clear 
effects on credit card delinquency. Also, the relative sample sizes of 
PACE borrowers who had credit cards compared to PACE borrowers with 
pre-existing non-PACE mortgages are irrelevant. The PACE Report shows 
that the sample of PACE borrowers with a pre-existing non-PACE mortgage 
was large enough that the resulting difference-in-differences estimates 
were precise, with reasonably small standard errors.
    Credit card delinquency rates may be informative for consumers 
without a non-PACE mortgage, although the CFPB notes that industry 
commenters also held that many consumers in the PACE Report's data who 
appeared not to have a non-PACE mortgage likely in fact had a mortgage, 
such that we would not expect a strong effect on credit card 
delinquency or balances in this group. Indeed, if those comments are 
correct, the effect of PACE loans on consumers' credit card outcomes is 
probably more negative than what was estimated in the PACE Report.
    With respect to the commenter's assertion that consumers will use 
credit cards if a PACE loan is not available, and thus incur additional 
interest charges, the CFPB finds this to be unlikely for multiple 
reasons. First, the PACE Report shows that, if anything, Originated 
Consumers tend to have higher credit card balances than Application-
Only Consumers. While there are limitations to that finding, discussed 
above in part VI.C, it is clearly inconsistent with the notion that 
credit card usage will increase absent a PACE loan. In addition, the 
commenter presupposes that, absent a PACE loan, the consumer would 
necessarily engage in the home improvement project at all.
    To the extent that some consumers continue to receive PACE 
transactions that they are not able to afford in contravention of the 
ability-to-repay requirements of this final rule, the rule will benefit 
those consumers by providing an avenue for obtaining relief under the 
civil liability provisions of TILA and Regulation Z. The CFPB does not 
have data indicating how often this would occur, although as noted 
below in its discussion of litigation costs to covered persons, the 
CFPB expects that this would be infrequent in the long run.
Costs of the Ability-to-Repay Provisions to Consumers
    In the proposal, the CFPB discussed the possibility that consumers 
would face the time costs of gathering the required documentation for 
an ability-to-repay analysis, such as finding and producing W-2s to 
document proof of income. The CFPB has previously noted in the context 
of non-PACE mortgages that the time required to produce pay stubs or 
tax records should not be a large burden on consumers. This may have 
been different in the past in the case of PACE transactions, as these 
transactions are typically marketed in conjunction with home 
improvement contracts, and consumers may not be prepared to produce 
income documentation at the point of sale for a home improvement. 
However, given recent changes in State law, the rule likely will not 
increase time costs in a meaningful way for PACE applicants because 
these consumers already must produce at least some documentation 
similar to what will be necessary for an ability-to-repay determination 
as part of a PACE application under the rule. Producing income 
information is also likely to be required by alternative financing 
options to a PACE transaction, as this is generally required for home 
improvement loans covered by TILA.
    Consumers will also face costs under the rule due to losing access 
to PACE financing. This includes consumers whose PACE applications are 
denied due to failing the ability-to-repay determination, as well as 
consumers who do not apply for a PACE loan as a consequence of the 
rule.\283\ For consumers who cannot, in fact, afford the cost of a PACE 
transaction, being denied is likely a benefit on net, as discussed 
above. However, some consumers who could, in fact, afford and benefit 
from a PACE transaction may be denied as a result of the rule.
---------------------------------------------------------------------------

    \283\ Consumers might not apply for a PACE loan due to the 
effect of the rule if home improvement contractors who otherwise 
might have marketed PACE financing withdraw from that market, or if 
the consumers opt not to proceed with a PACE transaction as a 
consequence of the provisions of the rule.
---------------------------------------------------------------------------

    To quantify the cost to consumers of having applications for PACE 
transactions denied, the CFPB would need to be able to calculate the 
number of consumers that could afford the cost of a PACE transaction 
and would benefit from it but would be denied as a result of the rule, 
and the cost to the average consumer of being denied. The CFPB can 
roughly quantify the number of consumers and discusses this below, but 
it does not have the data necessary to quantify the average cost, and 
thus its discussion is ultimately qualitative in nature.
    The experience of California under the ability-to-pay regime of the 
2018 California PACE Reforms provides a possible benchmark as to how 
the rule will affect PACE application approval rates. The PACE Report 
shows that approval rates dropped sharply in California following the 
effective date of the 2018 California PACE Reforms in April 2018, but 
then fully recovered in 2019. Initially, approval rates fell from 
around 55 percent to around 40 percent.\284\ However, the Report finds 
that approval rates recovered over time, rising back to around 55 
percent by the

[[Page 2487]]

end of 2019. Using Florida as a comparison group, the Report finds that 
the 2018 California PACE Reforms lowered the approval rate for PACE 
applications in California by about 7 percentage points, although this 
average includes both the initial drop and the later recovery.\285\ 
Although the provisions of the rule differ from the requirements of the 
2018 California PACE Reforms, it is likely that the rule will have 
limited additional effect on PACE transaction approval rates in 
California. Instead, the rule will primarily reduce approval rates 
instates that have not adopted robust ability-to-repay provisions. 
While Florida now has a requirement for PACE companies to confirm 
consumers' income, the statute generally provides that the total 
financing cannot exceed 10 percent of the property owner's annual 
household income,\286\ which, as discussed above, is a threshold 
unlikely to cause many consumers to be rejected.
---------------------------------------------------------------------------

    \284\ See PACE Report, supra note 12, at Figure 16.
    \285\ Id. at Table 13.
    \286\ Fla. Stat. sec. 163.081(3)(a)(12).
---------------------------------------------------------------------------

    The CFPB can calculate an upper bound on the number of PACE 
applicants who are likely to be denied due to the rule, using the 
change in approval rates discussed above, along with the number of PACE 
loan applications received by PACE companies at the baseline. The PACE 
Report indicates that PACE companies received about 45,500 applications 
in Florida in 2019. As discussed further in the CFPB's analysis of 
benefits and costs to covered persons, the PACE Report shows that 
applications fell in California by more than half following the 2018 
California PACE Reforms and did not recover over time. Assuming that 
the same has occurred in Florida since 2019 due to Florida's change in 
State law, this would mean that PACE companies currently receive around 
22,750 applications annually for which they do not currently apply 
robust ability-to-repay standards as would be required by the rule. 
Assuming that approval rates fall by 7 percentage points due to the 
rule, that would mean at most about 1,600 consumers annually might have 
a PACE application that they could afford, and from which they may 
benefit, be denied. This is an overcount, as many of these consumers in 
fact would not be able to afford a PACE transaction, and, moreover, the 
PACE Report shows that approval rates recovered over time.
    Some of the expected reduction in PACE applications may represent a 
cost to consumers as well, to the extent this arises from PACE 
financing being less available in general to consumers who could afford 
and benefit from it. However, as discussed below, one benefit of the 
rule will be that consumers will be less likely to misunderstand the 
nature of a PACE transaction, which will also reduce PACE applications. 
As also discussed below, a substantial fraction of PACE transactions 
are paid off early in the term of those transactions, which may be 
related to such misunderstandings. Although the CFPB expects the volume 
of PACE transactions in some States may decline as a result of this 
rule, it does not have data that would indicate how much of this 
decline will be a cost to consumers who miss out on a transaction they 
would prefer to engage in, and how much is a benefit to consumers who 
had no interest in participating in a PACE transaction once they 
understood its true nature or would not have been able to afford the 
PACE transaction.
    The CFPB can characterize qualitatively the consumer costs of not 
receiving a PACE transaction. The immediate impact to a consumer who 
might otherwise have agreed to a PACE transaction but is either denied 
or is not offered a PACE transaction due to the rule's provisions 
relating to ability-to-repay is that the consumer either must pay for 
the home improvement project in cash or with another financing product, 
or else the consumer must forgo the home improvement project.
    Paying cash for a home improvement project is not likely to be 
costly to consumers who choose to do so. Although this involves a 
large, upfront expenditure, it is unlikely that consumers will 
frequently agree to pay cash for a home improvement project they cannot 
afford--they will generally forgo the project instead, the costs of 
which are discussed below, or find other means of financing. Moreover, 
even if a consumer's budget might be strained in the short term by the 
expenditure, the consumer would then save on the--potentially 
substantial--cost of interest and fees on a loan.
    The impact on consumers, relative to the baseline, of using another 
credit product may be either a cost or a benefit depending on the cost 
of the other credit product. If the next best alternative has a lower 
APR than the relevant PACE transaction, consumers who may have received 
a PACE loan but do not due to the rule's provisions relating to 
ability-to-repay could be better off than they would be without the 
rule. Conversely, if the next best alternative for a consumer has a 
higher APR, those consumers would be worse off. The PACE Report shows 
that estimated APRs for PACE transactions originated between 2014 and 
2019 averaged 8.5 percent.\287\ Information provided by commenters, 
confirmed by data from bond rating agencies for PACE loan-backed 
securities, indicated that more recent PACE loans have interest rates 
of around 10 percent.\288\ Given that the PACE Report finds that PACE 
loans had fees sufficient to raise the APR a full percentage point 
above the interest rate, it is reasonable to conclude that current APRs 
for PACE loans are about 11 percent. This is greater than typical rates 
for home equity lines of credit and much greater than the interest rate 
for a cash-out refinance, but less than typical rates for credit 
cards.\289\ The interest rate on PACE transactions may be more or less 
than the cost of an unsecured loan for the same home improvement 
project, which can vary widely depending in part on the consumer's 
credit score.
---------------------------------------------------------------------------

    \287\ Id. at Table 2.
    \288\ See e.g., Morningstar, DBRS, Rating U.S. Property Assessed 
Clean Energy (PACE) Securitizations (Aug. 2024).
    \289\ Average credit card interest rates on accounts assessed 
interest were between 13 and 17 percent during the period studied by 
the PACE Report; the average as of 2024 is between 22 and 23 
percent. See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St. Louis, 
Commercial Bank Interest Rate on Credit Card Plans, Accounts 
Assessed Interest (Oct. 2, 2024), https://fred.stlouisfed.org/series/TERMCBCCINTNS. Interest rates for personal loans averaged 
around 10 percent during the period studied by the PACE Report, and 
rose to about 12 percent in 2024. See Fed. Rsrv. Econ. Data, Fed. 
Rsrv. Bank of St. Louis, Finance Rate on Personal Loans at 
Commercial Banks, 24 Month Loan (Oct. 2, 2024), https://fred.stlouisfed.org/series/TERMCBPER24NS. The median interest rate 
on home equity lines of credit was 5.34 percent in 2019 based on 
HMDA data. See CFPB, An Updated Review of the New and Revised Data 
Points in HMDA: Further Observations using the 2019 HMDA Data (Aug. 
2020), https://files.consumerfinance.gov/f/documents/cfpb_data-points_updated-review-hmda_report.pdf. In 2023, the most recent year 
available, the same data show a median rate of 7.99 percent. See 
CFPB, HMDA Data Browser, https://ffiec.cfpb.gov/data-browser/.
---------------------------------------------------------------------------

    The PACE Report suggests that under the final rule, many consumers 
who will not receive a PACE transaction will be able to obtain credit 
through another source, potentially at a better APR than the PACE 
transaction. The Report shows that the vast majority of PACE borrowers 
had other credit available. The Report shows that almost 99 percent of 
PACE borrowers between 2014 and 2019 had sufficient credit history to 
have a credit score, almost 90 percent of PACE borrowers had a credit 
card pre-PACE transaction, and on average PACE borrowers had more than 
seven unique credit accounts of any type pre-PACE transaction.\290\ 
More than half of PACE borrowers had prime or super-prime credit scores 
at the time

[[Page 2488]]

they entered into a PACE transaction.\291\ However, as discussed above 
in part VI.C, this aspect of the PACE Report's analysis was limited to 
consumers for whom the CFPB's contractor was able to match to its 
credit record data. As discussed above, while most of these unmatched 
consumers likely have had a mismatch in name or address with the credit 
reporting company's database, likely at least some of these consumers 
had no credit report and were credit invisible. Credit invisible PACE 
consumers may not have ready access to credit other than PACE loans.
---------------------------------------------------------------------------

    \290\ See PACE Report, supra note 12, at Table 6.
    \291\ See id. at Figure 1.
---------------------------------------------------------------------------

    Two PACE companies disagreed with the CFPB's conclusion in the 
proposal that PACE loan borrowers who would not receive a PACE loan 
under the rule would have access to other forms of credit, potentially 
at lower cost, should they decide to proceed with the same home 
improvement project. The commenters stated that it was inappropriate 
for the CFPB to compare PACE loan APRs to APRs for home equity loans 
and HELOCs, as home equity loans and HELOCs typically have tighter 
credit standards than PACE loans. One of these commenters noted that 
the proposal cited interest rates from 2019 and earlier and stated that 
interest rates and APRs for home equity loans and HELOCs have risen 
substantially since 2021, along with interest rates throughout the 
economy. A PACE company stated that, if PACE loan borrowers had access 
to other forms of credit and chose to take out a PACE loan, PACE must 
have been especially appealing to those consumers.
    With respect to comments asserting that the CFPB should have 
compared APRs on PACE loans to a different benchmark, as the CFPB 
discussed in the proposal and again in this final rule, it is not 
obvious what interest rate is most appropriate as a benchmark for PACE 
loans. Reasonable arguments can be made for comparing PACE loans to 
multiple products, each of which have significantly different average 
interest rates. Plausible comparisons include first-lien mortgages, 
home equity loans, home equity lines of credit, personal loans, home 
improvement loans, and credit cards. PACE loans have notably higher 
rates than some of these products but lower rates than credit cards. 
The CFPB notes that the information from the commenters was 
contradictory on this point. For instance, one PACE company suggested 
that, due to recent increases in interest rates for non-PACE mortgages, 
the average APR for PACE loans of 7.6 percent cited in the PACE Report 
and the proposal was now on par with interest rates for HELOCs. 
However, the same commenter also noted that its recently originated 
PACE loans have an average interest rate of 9.9 percent. This suggests 
that PACE loans continue to have interest rates several percentage 
points higher than non-PACE mortgages or HELOCs.
    The CFPB does not agree with commenters' assertion that borrowers 
taking out PACE loans, despite having access to other forms of credit, 
is relevant to evaluating the benefits of PACE, or to the cost to 
consumers of making PACE loans less accessible. As PACE industry 
stakeholders themselves asserted in comments, point-of-sale origination 
is a key feature of PACE financing as it currently exists--home 
improvement contractors often present a PACE loan as a financing option 
in the course of marketing their services door-to-door. PACE industry 
and home improvement contractor commenters alike noted the importance 
of swift originations under the current business model for PACE loans. 
Among other concerns, commenters asserted that consumers and home 
improvement contractors would select other financing options if PACE 
originations were not swift. While swift originations may have 
advantages to industry stakeholders in particular, swift originations 
can impede consumers' ability to make an informed decision about the 
transaction. In such situations, it can be more difficult to compare 
options for financing a home improvement contract, or even to compare 
options for the home improvement contract itself. As such, while a PACE 
loan could be the best choice for a particular consumer, the fact that 
the consumer had other options but chose a PACE loan says little about 
the appeal of the PACE loan relative to other options.
    If the consumer does not opt to proceed with the home improvement 
project, the cost is the loss of the benefits of that project. The 
nature of these costs would depend on the type of project and the 
reasons the consumer was considering the project. For the types of home 
improvement projects that might be eligible for PACE financing, the 
benefit of the project is primarily the energy, water, or insurance 
savings the project would have delivered.\292\ Other projects may be 
used to replace critical home equipment such as an HVAC system, without 
which the consumer would face the cost of not having that equipment. 
The CFPB does not have data available to estimate the average energy, 
water, or insurance savings actually obtained by PACE borrowers, nor is 
the CFPB aware of any research to estimate real-world savings from PACE 
transactions. One study the CFPB is aware of estimates aggregate energy 
savings from customers of one PACE company, but this is based on 
engineering estimates of the savings from each project.\293\ The 
academic literature has found that engineering estimates can frequently 
overestimate real-world savings from energy efficiency programs.\294\ 
Public comments from consumer advocacy groups in response to the 
Advance Notice of Proposed Rulemaking also cited instances where 
consumers received smaller energy savings than what was advertised to 
them.
---------------------------------------------------------------------------

    \292\ Home values may also increase as a result of the home 
improvement projects, but generally this will be the consequence of 
capitalizing the value of future energy, water, or insurance savings 
already considered here. With respect to insurance savings, industry 
stakeholders and local government stakeholders in Florida have 
asserted to the CFPB that consumers may have difficulty obtaining 
homeowners' insurance for homes in Florida with roofs above a 
certain age. If a consumer cannot obtain homeowners' insurance on 
real property that secures a non-PACE mortgage, lenders may force-
place insurance, generally at higher premiums than consumer-
purchased insurance. PACE transactions may be used for roof 
replacements in Florida, and consumers may save on insurance costs 
if they utilize a PACE transaction for this purpose.
    \293\ Adam Rose & Dan Wei, Impacts of Property Assessed Clean 
Energy (PACE) program on the economy of California, 137 Energy Pol'y 
111087 (2020).
    \294\ See e.g., Meredith Fowlie, Michael Greenstone & Catherine 
Wolfram, Do Energy Efficient Investments Deliver? Evidence from the 
Weatherization Assistance Program, 133 Q J of Econ. 3 (Aug. 2018).
---------------------------------------------------------------------------

    Multiple PACE industry stakeholders stated that the home 
improvement projects funded by PACE loans have benefits to PACE loan 
borrowers and to society at large and stated that a cost of the 
proposed rule would be to remove those benefits. The commenters cited a 
variety of benefits, including reductions in energy use, reductions in 
homeowner's insurance costs, increased jobs, and increased home values. 
The commenters did not provide specific data on this point beyond the 
academic study based on engineering models that the CFPB cited in the 
proposal.\295\
---------------------------------------------------------------------------

    \295\ Adam Rose & Dan Wei, Impacts of Property Assessed Clean 
Energy (PACE) program on the economy of California, 137 Energy Pol'y 
111087 (2020).
---------------------------------------------------------------------------

    The CFPB acknowledged in the proposal that, to the extent that PACE 
loans currently fund beneficial home improvement projects that would 
not occur without a PACE loan, the rule would impose costs by 
eliminating the benefits of those projects. However, as the CFPB also 
noted in the proposal, many projects funded by PACE loans would likely 
have been completed

[[Page 2489]]

without PACE loans. This can be seen in the high frequency of pre-
payment of PACE loans and the broad availability of other credit to 
PACE loans documented in the PACE Report. Other funding mechanisms 
might come at a higher or lower cost to consumers than a PACE loan 
(discussed further above), but in either event would deliver any 
benefits of the home improvement projects themselves.
    A mortgage industry trade association stated that the CFPB's 
proposed 1022(b) analysis omitted a potential benefit to consumers of 
the rule: avoiding a tax sale. The commenter stated that consumers who 
do not have a pre-existing non-PACE mortgage are at risk of a tax sale 
in the event that they fail to pay a PACE loan. The commenter stated 
that the CFPB should have considered the benefit to consumers of 
avoiding this risk as a potential benefit of the rule, to the extent 
that the rule prevents consumers from taking out unaffordable PACE 
loans.
    The CFPB agrees with the comment that another potential negative 
outcome for consumers who cannot afford a PACE loan could occur if 
consumers lose their home through a property tax sale. The CFPB does 
not have data available to quantify this impact, nor did any commenter 
provide relevant data.
    Industry commenters identified additional costs to consumers of not 
having access to affordable PACE loans beyond the costs discussed 
above, or otherwise criticized the CFPB's analysis of this issue.
    A PACE company and several home improvement contractors stated that 
consumers often use PACE loans for emergency situations, such as a 
replacement of a failed air conditioner during times of high heat. The 
commenters stated that, in such situations, consumers cannot wait days 
for work to begin and would suffer potentially severe consequences if 
they cannot finance the emergency work. The PACE company cited 
statistics from the California Department of Financial Protection and 
Innovation that the commenter asserted demonstrated that an emergency 
exemption allowed under California State law was used frequently.
    The CFPB notes that Regulation Z already has provisions for 
emergency exceptions to the waiting period requirements under the TILA-
RESPA integrated disclosure rules.\296\ If a consumer determines that 
an extension of credit is needed to meet a bona fide personal financial 
emergency, the consumer will be permitted to modify or waive the 
mandatory waiting periods and receive the PACE loan early. The CFPB 
also notes that, although data from the California Department of 
Financial Protection and Innovation indicates some PACE loans in that 
State have taken advantage of the emergency provisions in California 
State law, the number of these loans is quite small, and most of the 
emergency loans were not related to HVAC projects as asserted by 
commenters. For instance, in 2021, there were about 5,700 PACE loans in 
California, but only 42 that used the emergency provision, and of these 
only three involved an HVAC replacement; the remaining projects were 
related to energy efficiency improvements.\297\
---------------------------------------------------------------------------

    \296\ See 12 CFR 1026.19(e)(1)(v), (f)(1)(iv) (providing for the 
modification or waiver of applicable waiting periods if the consumer 
determines that the extension of credit is needed to meet a bona 
fide personal financial emergency and provides the creditor a dated 
written statement).
    \297\ See Cal. Dep't of Fin. Prot. & Innovation, Annual Report 
of Operation of Finance Lenders, Brokers, and PACE Administrators 
Licensed Under the California Financing Law, at table 18 and table 
35 (Aug. 2023). https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/2022-Annual-Report-CFL-Aggregated.pdf.
---------------------------------------------------------------------------

    One PACE company and a PACE industry trade association stated that 
the CFPB failed to sufficiently consider the costs to disadvantaged 
groups, such as seniors and minority borrowers, of losing access to 
PACE loans. A PACE company also stated that, because PACE companies do 
not determine eligibility based on credit history, the product is 
inherently non-discriminatory. The commenter cited the finding from the 
PACE Report that PACE loans similarly impact consumers in majority 
Hispanic census tracts, compared to consumers in majority white census 
tracts. The commenter also cited the finding from the PACE Report that 
older borrowers were affected similarly to younger borrowers. The 
commenter stated that these findings meant that Black, Hispanic, and 
older borrowers specifically benefit from PACE loans.
    The CFPB does not agree with the commenters asserting that it 
failed to consider costs of the proposal to older borrowers or to Black 
or Hispanic borrowers. As the commenters note, the PACE Report includes 
separate estimates of the effect of PACE loans on mortgage delinquency 
by demographic characteristics. The PACE Report finds similar impacts 
on consumers residing in majority-minority census tracts as on 
consumers in majority-white census tracts, and also finds similar 
effects on younger and older borrowers. However, the findings of the 
PACE Report do not provide evidence that older borrowers benefit from 
PACE loans more than younger borrowers, nor that minority borrowers 
benefit more than white borrowers. Rather, PACE loans seem to be 
equally affordable to consumers from each group. There is no evidence, 
including in the PACE Report, that indicates that Black or Hispanic 
consumers or older consumers are uniquely harmed or benefited by PACE 
loans at baseline, and so the CFPB did not discuss this finding in the 
proposal.
    Finally, a PACE industry trade association stated that losing 
access to PACE loans would result in consumers losing PACE companies' 
oversight of home improvement contractors. This commenter stated that 
home improvement contractors in general frequently engage in deceptive 
marketing and other problematic business practices, but contractors 
acting as solicitors for PACE companies are held to a higher standard. 
The commenter stated that reducing access to PACE loans would increase 
consumers' exposure to non-PACE-affiliated contractors.
    The CFPB acknowledges, as the commenters suggest, that reduced 
access to PACE financing could also change the behavior of the average 
home improvement contractor that consumers encounter--contractors no 
longer marketing PACE loans may no longer need to adhere to certain 
practices that PACE industry participants have put in place to help 
protect consumers, for example. The CFPB does not have data available 
to quantify these potential effects. However, even to the extent that 
this final rule reduces the use of PACE loans, the CFPB does not expect 
the rule to generally worsen the conduct of home improvement 
contractors on average as home improvement contractors who currently 
market PACE loans make up a small fraction of home improvement 
contractors in the States where they operate (see part VII for further 
discussion).
Potential Benefits and Costs to Covered Persons of the Ability-To-Repay 
Provisions
    The ability-to-repay provisions would primarily affect PACE 
companies. Although the CFPB understands that local government sponsors 
are generally the creditor, as defined in TILA, for PACE transactions, 
the CFPB expects that the required ability-to-repay determination, and 
in practice the liability for any failures to make that determination, 
would fall on the PACE

[[Page 2490]]

companies that run PACE programs.\298\ Although the PACE Report 
provides some information on potential impacts of the ability-to-repay 
provisions on PACE companies, many of the potential benefits and costs 
to PACE companies are outside the scope of the Report. The CFPB 
discusses these benefits and costs qualitatively here.
---------------------------------------------------------------------------

    \298\ The CFPB is aware that there may be programs authorized or 
administered by government entities that are not commonly understood 
as PACE, but that nonetheless meet the definition of PACE financing 
established in EGRRCPA section 307 and implemented under 12 CFR 
1026.43(b)(15). Data on such programs is dispersed, and so the CFPB 
does not have sufficient information to reliably estimate how many 
such programs exist or to assess their current practices in 
providing financing. The CFPB understands these programs to operate 
independently of one another, under differing laws and practices. 
Consequently, the CFPB is unable to quantify (1) the number of such 
programs; (2) how many of those programs are operated by covered 
entities; or (3) the effects the rule will have on each such covered 
entity. Any such program's additional costs under the ability-to-
repay provisions would depend on its current procedures. Although 
some commenters--who were not themselves operating or affiliated 
with such programs--cited examples of programs of this nature, 
commenters did not provide information regarding any of the 
quantities noted above.
---------------------------------------------------------------------------

    PACE companies may benefit from legal clarity provided by the 
ability-to-repay provisions. As described above in part II.A, some PACE 
companies have been targets of legal actions from consumers and 
regulators. Some PACE companies have exited the industry citing such 
actions as at least a partial cause.\299\ These legal actions were not 
necessarily related to PACE companies' consideration of consumers' 
ability to repay--many related to conduct by home improvement 
contractors who marketed the PACE transactions. However, the required 
TILA-RESPA integrated disclosures (discussed in more detail below) may 
make it more likely that consumers correctly understand the nature of a 
PACE transaction, potentially preventing some legal actions. The CFPB 
does not have data on the frequency of lawsuits facing PACE companies 
currently, nor does it have data on the claims in those lawsuits that 
would allow the CFPB to determine what share might be prevented by 
following the ability-to-repay provisions.
---------------------------------------------------------------------------

    \299\ See, e.g., Decl. of Shawn Stone, CEO of Renovate America, 
In Support of Chapter 11 Petitions and First Day Motions, Case No. 
20-13172 (Bankr. D. Del. 2020).
---------------------------------------------------------------------------

    By providing a Federal ability-to-repay standard, the rule may also 
encourage greater consistency across States. For example, the CFPB 
understands that PACE companies currently adhere to different processes 
for determining consumer eligibility for PACE transactions in 
California, involving some collection and verification of income and 
other documentation, than in Florida, where eligibility determinations 
generally involve less documentation. If the rule encourages more 
standardized processes across States, this could result in reduced 
operating cost for PACE companies, which may offset some of the costs 
described below.
    More broadly, imposing a nationwide minimum ability-to-repay 
standard could make it easier for PACE companies to expand into 
additional States, leading to additional business. As noted above, many 
States have legislation authorizing PACE transactions,\300\ but 
currently PACE companies are primarily active in just two States. Local 
governments in States with legislation authorizing PACE transactions 
may have a variety of reasons for opting not to engage with a PACE 
company to start a PACE program. However, the CFPB finds it plausible 
that controversies and consumer protection concerns discussed in part 
II.A above may in part hold some government entities back from engaging 
in PACE. To the extent this is the case, the final rule may address 
those concerns and provide opportunities for PACE companies to grow, or 
for new PACE companies to enter the market. To the extent this occurs, 
the benefits could be considerable. The PACE Report documents that PACE 
origination volumes grew rapidly in both California and Florida when 
PACE companies entered those States.\301\ However, rapid growth may not 
materialize to the same extent in other States if the rapid growth in 
California and Florida was premised on business practices that will be 
prohibited by the rule.
---------------------------------------------------------------------------

    \300\ See part II.A.2, supra.
    \301\ See PACE Report, supra note 12, at Figure 16.
---------------------------------------------------------------------------

    Although PACE companies will likely receive some of the benefits 
discussed above from the ability-to-repay provisions, PACE companies 
will also likely experience significant costs, including reduced 
lending volumes, one-time adjustment costs, and ongoing costs for 
training and compliance.
    The PACE Report documents that, following the effective date of the 
2018 California PACE Reforms, PACE applications and originations fell 
sharply in that State, with no corresponding decline in Florida around 
the same time.\302\ Using Florida as a control group, the Report finds 
that PACE applications in California declined by more than 3,400 per 
month due to the provisions of the 2018 California PACE Reforms, from 
an average of over 5,300 per month in that State prior to the 
reforms.\303\ The Report finds that the number of originated PACE 
transactions in California declined by about 1,000 per month due to the 
2018 California PACE Reforms, representing about a 63 percent decrease 
from a pre-reform average of about 1,600 originations per month in 
California.\304\ The specific requirements of the 2018 California PACE 
Reforms differ from those of this final rule, even with respect to 
provisions having to do with the California ability-to-pay requirements 
and this rule's ability-to-repay requirements, but the CFPB expects 
that following ability-to-repay requirements in States without 
similarly robust ability-to-repay provisions will lead to a similar 
decline in originated loans for PACE in those States. However, the CFPB 
notes again that, in the specific case of Florida, the recent change in 
Florida State law has created some elements of an ability-to-repay 
regime at baseline. While that change in State law likely will lead to 
a reduction in originations, that decline is not an impact of this 
final rule. The CFPB does not expect that the ability-to-repay 
requirements in this rule will cause an additional reduction in PACE 
transactions in California due to the mechanisms discussed above.
---------------------------------------------------------------------------

    \302\ Id.
    \303\ Id. at Table 13.
    \304\ Id.
---------------------------------------------------------------------------

    In addition, the decline in PACE applications in California 
following the 2018 California PACE Reforms that is documented in the 
PACE Report may have been accentuated by adjustments to firms' 
behavior. That is, it is possible that PACE companies refocused 
marketing and other efforts on Florida following the implementation of 
the 2018 California PACE Reforms. This type of shifting would not occur 
for the same reasons in response to a Federal regulation that applies 
nationwide, such as this rule.
    Multiple individual and industry commenters stated that the annual 
number of PACE loans might fall by half due to the rule. However, the 
commenters generally did not provide any additional data or analysis on 
this point, but rather cited the CFPB's estimate from the proposal.
    The CFPB reaffirms its proposed estimate that PACE lending might 
fall by as much as half in states that did not previously require 
consideration of income, primarily due to reduced application volume, 
as opposed to long-term reductions in approvals of submitted 
applications. However, the CFPB notes that, since the proposal was 
issued in May 2023, Florida has begun

[[Page 2491]]

requiring PACE companies to verify income information. To the extent 
that the requirement to collect income information was responsible for 
reductions in PACE lending in California (for instance, because home 
improvement contractors are reluctant to do so and respond by ceasing 
to market PACE loans), the CFPB expects that such a reduction has 
already occurred or started to occur in Florida, such that the rule 
will not reduce PACE lending to the same extent as was estimated in the 
proposal.
    PACE companies will also likely experience one-time adjustment 
costs to update their systems and processes to accept and consider 
income and other information related to the proposed ability-to-repay 
requirements. These costs may include software and development, 
training of both PACE company staff and home improvement contractor 
affiliates, and costs for legal and compliance review of the changes to 
ensure compliance with the regulations. The CFPB does not have data 
indicating the magnitude of these costs. However, the CFPB notes that 
some of these costs may be ameliorated by existing State requirements. 
The CFPB understands that all currently active PACE companies already 
have systems in place to allow for collection of income information and 
other documentation needed for the ability-to-repay determination the 
rule requires. The CFPB thus expects that costs related to software 
changes will be relatively small, and that costs for training would 
likely be less than if there were no existing ability-to-pay 
requirements for PACE in any jurisdiction. The CFPB acknowledges that 
legal and compliance review costs would likely apply in all States, as 
the specific requirements of the rule differ from the requirements of 
State laws and regulations. PACE industry stakeholders did not indicate 
that one-time adjustment costs such as software changes would be 
significant, and generally did not call out legal and compliance review 
as major costs of the proposal.
    PACE companies may also experience additional litigation costs due 
to alleged violations of the ability-to-repay provisions. As noted 
earlier in this analysis, the final rule applies civil liability in 
TILA section 130 to PACE companies that are substantially involved in 
making the credit decision. As the CFPB stated in the January 2013 
Final Rule, even creditors making good faith compliance efforts when 
documenting, verifying, and underwriting a loan may still face some 
legal challenges from consumers. This could occur when a consumer 
proves unable to repay a PACE loan and wrongly believes (or chooses to 
assert) that the creditor failed to properly assess the consumer's 
ability to repay before making the loan. As discussed in the January 
2013 Final Rule, this will likely result in some litigation expense, 
although the CFPB believes that, over time, that expense will likely 
diminish as experience with litigation yields a more precise 
understanding regarding what level of compliance is considered 
sufficient. After a body of case law develops, litigation expense will 
most likely result where compliance is insufficient or from limited 
novel sets of facts and circumstances where some ambiguity remains. 
Moreover, as the CFPB also stated in the January 2013 Final Rule, the 
CFPB believes that even without the benefit of any presumption of 
compliance, the actual increase in costs from the litigation risk 
associated with ability-to-repay requirements would be quite modest. 
This is a function of the relatively small number of potential claims, 
the relatively small size of those claims, and the relatively low 
likelihood of claims being filed and successfully prosecuted. The CFPB 
notes that litigation likely would arise only when a consumer in fact 
is unable to repay the loan (i.e., is seriously delinquent or has 
defaulted), and even then only if the consumer elects to assert a claim 
and, in all likelihood, only if the consumer is able to secure a lawyer 
to provide representation; the consumer can prevail only upon proving 
that the creditor failed to make a reasonable and good faith 
determination that the consumer did not have an ability to repay at or 
before consummation or failed to consider the enumerated factors in 
arriving at that determination.
    Beyond PACE companies, the ability-to-repay provisions will impose 
some costs on local government entities and home improvement 
contractors.\305\
---------------------------------------------------------------------------

    \305\ Local government entities and home improvement contractors 
currently involved in PACE transactions may or may not be covered 
persons depending on the specific facts and circumstances of their 
involvement in PACE financing; to the extent they are not covered 
persons the CFPB exercises its discretion to consider benefits, 
costs and impacts to these entities.
---------------------------------------------------------------------------

    Some local government entities will experience costs due to the 
ability-to-repay provisions. The CFPB understands that local government 
entities receive some revenues from originated PACE transactions in the 
form of fees or a small percentage of the PACE payments collected 
through consumers' property tax payments. The CFPB does not have data 
indicating the average revenue that government entities receive from 
each PACE transaction, and commenters did not address this point. To 
the extent that the rule reduces the volume of PACE transactions, the 
CFPB expects that it will also reduce revenue to such government 
entities, in proportion to the revenue they currently receive from such 
transactions. If, as discussed above, the rule facilitates growth of 
PACE transactions in States that do not currently have active programs, 
local government entities in those State might benefit as a result.
    In the proposal, the CFPB discussed the possibility that home 
improvement contractors involved in PACE transactions would experience 
costs under the proposal due to the additional staff time required to 
collect the required information for the proposed ability-to-repay 
determination. However, as Florida State law now requires PACE 
companies to verify consumers' income before consummating a PACE 
transaction, it is unlikely that the rule will significantly increase 
costs in this respect.
    A special assessment administrator noted that PACE loans 
represented more than 50 percent of its revenue and expressed concern 
about a decline in this revenue due to the proposal.
    The CFPB acknowledges that the rule will likely impose costs on 
special assessment administrators who carry out the logistics of 
placing PACE transactions on county tax rolls, in proportion to the 
share of revenue they currently receive from PACE loans.
Potential Benefits and Costs to Consumers and Covered Persons of 
Clarifying That PACE Financing Is Credit
    The rule revises the official commentary for Regulation Z to 
clarify that PACE transactions are credit for purposes of TILA.\306\ In 
practice, this imposes a number of new requirements on PACE companies 
and other covered persons. Some relevant provisions whose benefits and 
costs are discussed below include (1) a right of recission; \307\ (2) 
disclosure requirements, including provision of relevant TILA-RESPA 
integrated disclosure forms and

[[Page 2492]]

mandatory waiting periods between provision of the disclosures and 
consummation; \308\ (3) requirements related to loan originators; \309\ 
and (4) certain requirements for PACE transactions that meet the 
definitions of a high-cost mortgage or a higher-priced mortgage 
loan.\310\ The CFPB is not addressing in depth other provisions.\311\ 
As with the ability-to-repay provisions discussed above, the CFPB 
expects that, in practice, most benefits and costs that derive from 
requirements for PACE creditors will ultimately be borne by PACE 
companies.
---------------------------------------------------------------------------

    \306\ See section-by-section analysis of Sec.  1026.2(a)(14), 
supra.
    \307\ Consumers have the right to rescind within three business 
days of consummation, delivery of the notice informing the consumer 
of the right to rescind, or delivery of all material disclosures, 
whichever occurs last. If the notice or disclosures are not 
delivered, the right to rescind expires three years after 
consummation, upon transfer of all of the consumer's interest in the 
property, or upon sale of the property, whichever occurs first. See 
12 CFR 1026.23(a)(3)(i).
    \308\ See, e.g., 12 CFR 1026.19(e)(1)(iii), (f)(1)(ii).
    \309\ See, e.g., 12 CFR 1026.36(a)(1)(i), 1026.36(d)-(g).
    \310\ 12 CFR 1026.32, 1026.34.
    \311\ For instance, PACE companies would also be required to 
comply with the prohibition on prepayment penalties under 12 CFR 
1026.43(g), but the CFPB does not expect this would create 
significant costs or benefits for consumers or covered persons, as 
the CFPB understands that PACE loans being made currently do not 
include these penalties. PACE contracts would also be prohibited 
from requiring the use of mandatory arbitration under 12 CFR 
1026.36(h), but the CFPB does not have information sufficient to 
determine the extent to which PACE contracts currently include 
mandatory arbitration clauses. To the extent mandatory arbitration 
clauses are currently in use, consumers and covered persons could 
incur benefits and costs as a result of this prohibition.
---------------------------------------------------------------------------

Benefits and Costs of the Right of Recission
    The right of recission could benefit consumers and impose costs on 
covered persons to the extent that consumers decide a PACE transaction 
is not appropriate for them during the rescission period and exercise 
the right. A rescission period could give consumers more time to 
exercise such preferences. However, the CFPB does not have data 
indicating whether PACE borrowers typically realize such a preference 
during the three-day period following origination of a PACE 
transaction. In addition, PACE borrowers in California and Florida 
already have a three-day right to cancel under State law,\312\ and PACE 
companies may currently voluntarily provide a recission option 
independent of these requirements. As a result, the CFPB expects the 
application of this provision of TILA to impose few benefits or costs 
on consumers and covered persons when the required TILA notice and 
material disclosures are provided.
---------------------------------------------------------------------------

    \312\ In California, consumers have the option to cancel within 
three business days after signing the agreement, receipt of the 
Financing Estimate and Disclosure, or receipt of the cancellation 
notice, whichever occurs last. See Cal. Sts. & Hwys. Code sec. 
5898.16. In Florida, a property owner may generally cancel a 
financing agreement within three business days after signing without 
penalty. See Fla. Stat. sec. 163.081(6).
---------------------------------------------------------------------------

    TILA provides an extended rescission period of up to three years 
when the required TILA notice and material disclosures are not 
provided.\313\ The CFPB does not have data that would allow it to 
estimate how often the extended rescission period would be available to 
PACE consumers.
---------------------------------------------------------------------------

    \313\ 15 U.S.C. 1635(f); 12 CFR 1026.23(a)(3)(i).
---------------------------------------------------------------------------

Benefits and Costs of TILA-RESPA Integrated Disclosure Requirements
    The disclosure requirements will likely benefit consumers by 
increasing their understanding of the terms of the PACE transaction and 
mandating a waiting period between disclosure and consummation. 
Mandating disclosures and a waiting period for PACE transactions 
conforming with TILA-RESPA integrated disclosure requirements will make 
it more likely that consumers understand the terms of their proposed 
PACE transactions. The TILA-RESPA integrated disclosure requirements 
will also help consumers comparison shop among financing options. Both 
the information in the disclosures and the waiting period will better 
enable consumers to compare the terms of a PACE loan to the terms of 
other credit options that may be available to them, particularly other 
credit products that are secured by the consumer's home. As discussed 
above, PACE loans have higher interest rates than other available 
credit products secured by the consumer's home. The disclosure 
requirements will also likely increase understanding of the fundamental 
nature of PACE transactions as financial obligations that must be 
repaid over time.
    Commenters responding to the Advance Notice of Proposed Rulemaking, 
as well as media accounts, have indicated that some PACE borrowers do 
not realize they are committing to a long-term financial obligation 
when they agree to a PACE transaction. This may occur, for example, due 
to deceptive conduct on the part of a home improvement contractor 
marketing the PACE transaction, or due to the complexity and 
unfamiliarity of the PACE transaction itself. Whatever the cause, it is 
more likely that a consumer receives the required TILA-RESPA 
disclosures will realize that they are signing up for a loan that must 
be repaid over time. As such, the rule may benefit consumers who would 
otherwise misunderstand the nature of a PACE transaction. Consumers who 
would not agree to a PACE transaction if they understood its nature as 
a financial obligation they would need to repay may be more likely to 
understand the nature of the transaction, and thus decline it. In 
addition, even consumers who would still agree to the transaction 
understanding its nature as a financial obligation would be more likely 
to prepare for the increase to their property tax bill caused by the 
PACE transaction.
    For consumers who would not, with full understanding, have agreed 
to a PACE transaction, the potential benefits of the final rule would 
depend on whether the consumer would still agree to the home 
improvement contract the PACE transaction was intended to fund. For 
consumers who would have been willing to proceed with the home 
improvement project without a PACE transaction, the CFPB assumes that 
at least some would seek to pay off the PACE transaction after the 
first payment becomes due.\314\ In this case, the benefit to the 
consumer would be saving the first year of interest on the PACE 
transaction, as well as up-front fees and any capitalized interest 
accrued prior to the first payment. The PACE Report finds that the 
average fee amount for PACE transactions made between 2014 through 2019 
was $1,301, and the average capitalized interest was $1,412.\315\ The 
average interest rate was 7.6 percent.\316\ On the average original 
balance of $25,001,\317\ this would result in interest payments of 
$1,900 in the first year. Thus, each consumer would save about $4,600 
in interest and fees if they avoided a PACE transaction rather than 
repaying it after the first payment becomes due. Further, if the 
consumer otherwise would not have agreed to the home improvement 
project (i.e., the consumer only agreed to the project based on a 
misunderstanding about the financing), the benefit of preventing 
misunderstanding is greater still, depending on the value the consumer 
nonetheless receives from the project.\318\
---------------------------------------------------------------------------

    \314\ If the consumer did not realize they had agreed to a loan 
at origination, this would become clear when their next property tax 
bill became due. The PACE Report finds that on average a consumer's 
total property taxes likely increased by almost 88 percent as a 
result of the PACE loan payment. PACE Report, supra note 12, at 13.
    \315\ Capitalized interest is calculated using the APR, the fee 
amounts, and the term and interest rate of the PACE transactions 
provided in the PACE Report. See id. at Table 2.
    \316\ Id.
    \317\ Id.
    \318\ Generally, the economic loss to a consumer from being 
induced to purchase something they would not otherwise purchase is 
the difference between the price paid and the consumer's willingness 
to pay for the good or service. If the consumer is not willing to 
make the purchase, by definition their willingness to pay is less 
than the price. In the context of a PACE transaction for an 
otherwise unwanted project, the consumer's willingness to pay would 
be less than the price paid to the contractor, which in turn is less 
than the full original balance due to fees and capitalized interest. 
Potentially a consumer's willingness to pay for a project could be 
zero, or even negative (i.e., the consumer would have to be paid to 
be willing to permit the project, had they understood). However, 
consumers may frequently have willingness to pay greater than zero 
for projects funded by PACE transactions, if only due to realized 
energy, water, or insurance savings.

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[[Page 2493]]

    The CFPB does not have data indicating how often consumers 
currently misunderstand the nature of a PACE transaction. To the extent 
that consumers currently misunderstand the nature of a PACE 
transaction, the CFPB does not have data indicating what those 
consumers might have done in the counterfactual, including what share 
might have proceeded with the PACE transaction, what share might have 
proceeded with the home improvement project with another financing 
option, or paying cash, and what share might have opted not to proceed 
with the home improvement project at all. The data used in the PACE 
Report do not capture when and whether PACE transactions were paid off. 
However, publicly available data for California indicate that a 
significant fraction of PACE transactions to date were paid off early 
in the term of the transaction. The California Alternative Energy and 
Advanced Transportation Financing Authority (CAEATFA) manages a loss 
reserve fund for California PACE programs and requires PACE companies 
to submit information on new PACE transactions semi-annually, and to 
report their overall portfolio size as of June 30th of each year.\319\ 
CAEATFA reports aggregate statistics from this collection publicly on 
its website.\320\ Using this information, the CFPB can calculate the 
number of PACE transactions paid off each year as the sum of the prior 
year's total portfolio and the current year's new transactions, less 
the current year's total portfolio. This is shown in Table 1 below.
---------------------------------------------------------------------------

    \319\ See Cal. State Treasurer, Property Assessed Clean Energy 
(PACE) Loss Reserve Program, https://www.treasurer.ca.gov/caeatfa/pace/activity.asp (last visited Oct. 22, 2024).
    \320\ Id.; see also Cal. State Treasurer, PACE Loss Reserve 
Program Enrollment Activity, https://www.treasurer.ca.gov/caeatfa/pace/enrollment-activity.xlsx (last visited Oct. 22, 2024).
---------------------------------------------------------------------------

    According to the CAEATFA data, there were 17,401 PACE transactions 
outstanding in California as of June 30, 2014, and 218,549 new 
transactions originated after that through June 30, 2023. However, 
about 150,000 transactions were paid off during this time, based on the 
change in total outstanding portfolios, meaning that up to about 64 
percent of PACE transactions may have been paid off early. This likely 
overstates somewhat the share of transactions that were paid early, and 
it very likely overstates the share of consumers who misunderstood the 
nature of the transactions. PACE transactions can have terms as short 
as five years, such that some transactions may have simply reached 
maturity. However, the PACE Report shows that only about 6 percent of 
PACE transactions have terms of five years.\321\ PACE transactions may 
be paid off early for reasons other than misunderstanding the nature of 
the transaction, including if the consumer sells their home and is 
required by the buyer to pay off the PACE transaction.\322\ Still, 
given the frequency of early repayments and the substantial potential 
benefits to individual consumers of preventing a misunderstanding about 
the nature of PACE as a financial obligation, the aggregate benefits 
could be substantial. For instance, if just 10 percent of early 
repayments on PACE transactions (i.e., 6 percent of all PACE borrowers, 
or roughly 1,430 annually) were due to a misunderstanding that the rule 
could address, the aggregate benefits would be over $6.6 million 
annually based on each consumer with a misunderstanding saving $4,600 
in interest and fees.\323\
---------------------------------------------------------------------------

    \321\ See PACE Report, supra note 12, at Figure A1.
    \322\ The CFPB does not have data indicating how often 
homeowners are required to pay off a PACE transaction when selling 
their home. However, as noted in part II.A.4, some mortgage lenders 
or investors prohibit making a new loan on a property with an 
outstanding PACE transaction. See supra note 19.
    \323\ Similar to the discussion above regarding the benefits of 
avoiding unaffordable PACE transactions, this calculation may 
overstate the aggregate benefits to the extent that existing State 
law prevents consumers from misunderstanding the nature of PACE 
transactions. Given that the number of PACE transactions paid off 
each year remained high after the implementation of the 2018 
California PACE Reforms, and given that the CFPB is being 
conservative in assuming for illustrative purposes that only 10 
percent of early repayments were due to misunderstandings, the CFPB 
has determined that this estimate is, on balance, likely an 
underestimate.

                                                                         Table 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       (a)  Actual total                           (c)  New        (d)  Actual total
                                                          outstanding           (b)  New          financings          outstanding       (e  Number paid
                        Year                          portfolio  through    financings July   January 1st- June    portfolio through   off  ((a) + (b) +
                                                       June 30th, prior      1st-  December     30th, current     June 30th, current        (c)-(d))
                                                             year          31st,  prior year         year                year
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015...............................................                17,401              7,022             11,515                34,308              1,630
2016...............................................                34,308             23,206             32,743                83,904              6,353
2017...............................................                83,904             34,036             25,850               121,088             24,708
2018...............................................               121,088             25,764             15,482               146,397             13,925
2019...............................................               146,397              9,982              6,967               146,516             16,827
2020...............................................               146,516              5,541              4,793               131,195             25,659
2021...............................................               131,195              4,999              3,343               115,715             23,822
2022...............................................               115,715              2,443              1,969                96,772             23,355
2023...............................................                96,772              1,623              1,287                85,375             14,307
                                                    ----------------------------------------------------------------------------------------------------
    Total..........................................                   N/A            114,607            103,942                   N/A            150,575
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CAEATFA, https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf.

    Consumer groups echoed their comments from the Advance Notice of 
Proposed Rulemaking that consumers frequently misunderstand the nature 
of PACE loans. Conversely, PACE industry commenters disagreed with the 
proposal's assumption that a portion of consumers who pre-paid their 
PACE loans did so because they had misunderstood the nature of the 
product and would not have taken the loan had they understood. These 
commenters took issue with the CFPB's discussion in the proposal of the 
potential benefit of avoiding misunderstandings of the nature of PACE 
loans. The commenters stated it was arbitrary and not based on data for 
the CFPB to assume that the 10 percent of PACE loans that were pre-paid 
were due to consumer misunderstanding. Some of these

[[Page 2494]]

commenters further stated that pre-payments of PACE loan were partly or 
primarily due to consumers taking advantage of low interest rates to 
refinance their PACE loans.
    The CFPB emphasizes that the calculation discussed above is 
intended to be illustrative, not definitive. The CFPB does not have 
specific data as to the share of consumers who misunderstand the nature 
of a PACE loan and would not take out a PACE loan had they understood. 
The calculation above is intended to provide a sense of scale for the 
potential benefits: If most pre-paid PACE loans are loans that the 
consumer understood the nature of or would have taken out with full 
understanding, but a small fraction are not, the benefits would be as 
stated above. If the rate of misunderstandings that are addressed by 
this final rule were larger or smaller, the benefit of the rule to 
consumers would be proportionately larger or smaller as well. In 
assuming for illustrative purposes that the vast majority of pre-
payments were unrelated to consumers misunderstanding the nature of the 
debt obligations, the CFPB is erring toward being conservative in its 
estimate. The CFPB also notes that the commenters' explanation that 
refinances account for frequent repayments is at odds with the 
arguments offered by some PACE industry stakeholders that PACE 
borrowers generally do not have other credit options at a lower cost 
than a PACE loan.
    By providing detailed information about the terms and payment 
amounts expected in a PACE transaction, TILA-RESPA integrated 
disclosures may also assist consumers in preparing for their first PACE 
payment, which can be a significant shock to their finances regardless 
of whether the consumer pays their property taxes directly or through a 
pre-existing mortgage escrow account. The PACE Report finds that the 
average PACE consumer's property tax bill likely nearly doubles as a 
result of the PACE loan.\324\ Particularly for consumers who do not pay 
property taxes through an escrow account, this can be a major 
expenditure shock. For consumers who do pay property taxes through an 
escrow account, the Report finds that mortgage payments increase 
substantially over the two years following the PACE transaction, 
indicating an expenditure shock as well.\325\ Some of the disclosures 
on the modified TILA-RESPA integrated disclosure form for PACE 
transactions may prompt consumers with a pre-existing non-PACE mortgage 
to inform their mortgage servicer of the PACE transaction. This, in 
turn, could prompt the servicer to conduct an escrow analysis to 
account for the PACE payment sooner than it otherwise would have and 
thus create a smaller monthly payment increase for the consumer.
---------------------------------------------------------------------------

    \324\ See PACE Report, supra note 12, at 13.
    \325\ Id. at 18-20.
---------------------------------------------------------------------------

    Several commenters took issue with the additional disclosures 
required by the rule. A PACE industry trade association stated that the 
``welcome calls'' employed by its members served as a more effective 
disclosure than TILA-RESPA integrated disclosure forms delivered on 
paper. A PACE company noted that the proposal's requirement to provide 
TILA-RESPA integrated disclosure forms would be costly. The commenter 
noted that the disclosures would be duplicative in light of existing 
disclosures required by State law. In addition, the same commenter 
stated that requiring both Closing Disclosures and Loan Estimates would 
impose unnecessary costs, because there typically are not settlement 
services that consumers can shop for in between the initial loan 
estimate and closing. The result, in the stated view of the commenter, 
would be two nearly identical disclosures that would impose costs on 
PACE companies with no benefit to consumers. However, a different PACE 
company stated that the TILA-RESPA integrated disclosure forms would be 
costly because of the need for new disclosures when changes to the home 
improvement contract are made and stated that such changes were very 
common. Commenters did not provide specific figures as to the cost of 
the required disclosures.
    The CFPB recognizes that the TILA-RESPA integrated disclosure forms 
required by the rule could result in consumers receiving multiple 
disclosures required by both Federal and State law as well as any other 
disclosures PACE companies provide voluntarily.\326\ The CFPB also 
recognizes that TILA and Regulation Z may require redisclosure if 
certain aspects of the transaction change. Given the reports of 
consumer confusion as to the nature of PACE loans in the past, the CFPB 
determines that, on balance, consumers will benefit from the TILA and 
Regulation Z. The CFPB acknowledges that provision of the disclosures 
will be costly for PACE companies and may be costly for home 
improvement contractors as well, depending on how the disclosures are 
provided.
---------------------------------------------------------------------------

    \326\ See supra note 106.
---------------------------------------------------------------------------

    PACE companies will experience one-time adjustment costs related to 
the TILA-RESPA integrated disclosure. The CFPB understands that PACE 
companies generally provide some disclosures with similar information 
at the point of sale, but not in the format or with precisely the same 
information as the disclosure that will be required under the final 
rule. The CFPB expects that ongoing costs will be minimal relative to 
the baseline, since PACE companies already provide disclosures. To the 
extent that the TILA-RESPA integrated disclosures for PACE require that 
PACE companies gather information that they do not currently collect, 
they may face additional costs of gathering that information.
    A PACE company stated generally that it would be costly for PACE 
companies to comply with the requirements of Regulation Z that would 
follow if PACE financing is credit under TILA. The commenter stated 
that the average cost of documenting ability-to-repay and providing 
TILA-RESPA integrated disclosure forms was $8,600 per loan, citing a 
non-PACE mortgage industry estimate of the average cost of non-PACE 
mortgage originations. The commenter further suggested that the cost 
for PACE companies would be higher still, on the order of $13,000, in 
line with an estimate from the same source for small independent 
mortgage lenders.
    While the CFPB acknowledges that PACE creditors or other covered 
parties may incur costs to comply with the requirements of Regulation 
Z, the CFPB notes that the commenter's estimate of $8,600 or more per 
loan is unlikely to be accurate. The commenter cited a Freddie Mac 
study that estimates $8,600 as the entire cost of originating a 
mortgage, including underwriting, recording, cost of funds, and 
more.\327\ That study also states that refinance mortgages are cheaper 
to originate than this benchmark. Refinance mortgages are likely a 
better benchmark for the costs of originating a PACE loan, as some of 
the costs involved in facilitating a home purchase are not present in 
the case of a PACE loan.
---------------------------------------------------------------------------

    \327\ See Freddie Mac, Cost to Originate Study: How Digital 
Offerings Impact Loan Production Costs (Nov. 2021), https://web.archive.org/web/20230717225358/https://sf.freddiemac.com/docs/pdf/report/cost-to-originate.pdf.
---------------------------------------------------------------------------

    The required seven-day waiting period between provision of the Loan 
Estimate and consummation may also impose costs on both PACE companies 
and the home improvement contractors who market PACE transactions. As

[[Page 2495]]

discussed in part II.A, the CFPB understands that, currently, PACE 
transactions are frequently originated on the spot, on the same day as 
the home improvement contractor approaches the consumer about a 
potential project. PACE industry stakeholders have expressed to the 
CFPB that this speed of origination is necessary to compete with 
unsecured financing options. It is possible that the seven-day waiting 
period will lead to a further reduction in PACE transaction volume due 
to reduced contractor participation if contractors prefer to offer only 
credit options that do not have such a waiting period. No States 
currently have a similar mandatory waiting period under State law as 
far as the CFPB is aware, so this aspect of the rule will likely affect 
PACE lending volumes in all States. The CFPB does not have data to 
indicate how large this effect might be.
    PACE industry stakeholders, including PACE companies, home 
improvement contractors and a government sponsor, expressed concern 
that the required seven-day waiting period between provision of the 
Loan Estimate and consummation would be particularly costly for their 
business. Multiple PACE companies noted that this may be costly to 
consumers as well in cases where PACE loans are used to fund emergency 
repairs. A PACE industry trade association cited a survey of home 
improvement contractors which showed that 60 percent of homeowners 
choose a home improvement contractor in less than 72 hours. The 
commenter noted that PACE companies are competing with other forms of 
financing, such as unsecured home improvement loans, that are available 
immediately, such that a seven-day waiting period would put PACE loans 
at a competitive disadvantage.
    As discussed above, the CFPB notes that TILA and Regulation Z 
already include an exception that would allow consumers to modify or 
waive applicable waiting periods between disclosure and consummation if 
the consumer determines that the extension of credit is needed to meet 
a bona fide personal financial emergency.\328\ As such, the CFPB does 
not believe the required waiting period will generally impose costs on 
consumers in the event of bona fide personal financial emergencies.
---------------------------------------------------------------------------

    \328\ See 12 CFR 1026.19(e)(1)(v), (f)(1)(iv).
---------------------------------------------------------------------------

    The CFPB acknowledges that the seven-day waiting period may delay 
the start date of projects that are financed by PACE loans but does not 
agree with the commenters that the delay is incompatible with the way 
that consumers choose contractors for home improvement work. While it 
may be the case that consumers prefer to choose a contractor quickly, 
work on a home improvement project frequently does not start 
immediately. For many projects funded by PACE loans, permits are 
required by State or local laws before work can begin, materials must 
be obtained, and the contractor may have a queue of other projects they 
must complete first. As such, it is unlikely that a delay of several 
days to finalize financing is inherently incompatible with a home 
improvement contractors' business model.
Benefits and Costs of Loan Originator Provisions
    TILA and Regulation Z include a variety of provisions that apply to 
loan originators. With current PACE industry practices, the CFPB 
understands that these provisions will primarily apply to home 
improvement contractors under the final rule. If home improvement 
contractors continue in their current roles and act as loan originators 
for PACE transactions, both the individual contractors and related 
companies would face compliance costs, including costs relating to 
applicable State or Federal licensing and registration 
requirements.\329\ The CFPB does not have data available to quantify 
the costs to home improvement contractors from complying with TILA as 
loan originators.
---------------------------------------------------------------------------

    \329\ 12 CFR 1026.36(f).
---------------------------------------------------------------------------

    Home improvement contractor commenters generally noted that 
complying with the loan originator requirements of TILA and Regulation 
Z would be costly. Several home improvement contractors stated this 
generally, but some commenters provided specific costs. A home 
improvement contractor trade association and one PACE company stated 
that becoming a loan originator in California would require 20 hours of 
training in addition to application, licensing, and testing fees. 
Commenters cited amounts between $400 and $800 as the total annual cost 
per contractor acting as a mortgage loan originator. Several home 
improvement contractors and other PACE industry stakeholders further 
stated that the applicable State requirements in California and Florida 
had other provisions for loan originators that are incompatible with 
PACE financing, including that loan originators must be employed by a 
licensed mortgage broker or lender. These commenters generally 
expressed that these types of requirements would severely limit or 
eliminate PACE lending because home improvement contractors would be 
unable or unwilling to satisfy them. One home improvement contractor 
noted that the costs to comply with Regulation Z were more affordable 
for non-PACE mortgage lenders than for small contractors.
    With respect to the cost of home improvement contractors becoming 
loan originators under TILA or the SAFE Act, the CFPB finds the cost 
estimates offered by some commenters--on the order of $800 annually per 
contractor--to be a reasonable estimate. The CFPB does not believe 
these costs will, by themselves, generally lead home improvement 
contractors to exit the PACE loan market. Some home improvement 
contractor commenters stated that large fractions of their annual 
business are funded by PACE loans, citing figures as high as 80 
percent. Against this amount of revenue, the increased fixed cost of 
licensing sales staff and estimators generally would not cause a 
contractor to become unprofitable. The CFPB also notes that projects 
funded by PACE transactions seem to be particularly profitable for 
contractors in some cases. Public data from California indicate that 
around a sixth of PACE loans made in that State in 2022 involved a 
payment from the contractor to the PACE company, whether as a buydown, 
seller's points, or other payment.\330\ The average such payment was 
over $6,000 in 2022. For this to be rational behavior, the underlying 
projects must have been more profitable, again suggesting that 
incurring the fixed costs of loan originator licensing and testing 
would be feasible for contractors.
---------------------------------------------------------------------------

    \330\ See Cal. Dep't of Fin. Prot. & Innovation, Annual Report 
of Operation of Finance Lenders, Brokers, and PACE Administrators 
Licensed Under the California Financing Law, at 41 (Aug. 2023), 
https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/2022-Annual-Report-CFL-Aggregated.pdf.
---------------------------------------------------------------------------

    With respect to conflicts between the requirements of Federal and 
State law, or additional Federal requirements where State law already 
imposes compliance obligations, the CFPB acknowledges that there may be 
some additional compliance burden on PACE companies and home 
improvement contractors, but the CFPB does not expect major disruptions 
to the PACE market due to these requirements in the long term. State 
law requirements vary, but depending on the requirements it may, for 
instance, be possible for home improvement contractors and PACE 
companies to satisfy a requirement for loan originator licensing by 
contactors and PACE companies registering as mortgage brokers and 
lenders

[[Page 2496]]

respectively. PACE companies and home improvement contractors may incur 
one-time adjustment costs to make these changes, but this is unlikely 
to make it impossible for home improvement contractors to market PACE 
loans, as some commenters claimed. In addition, both California and 
Florida have in recent years made changes to their PACE financing laws 
to increase consumer protections for PACE transactions, while 
continuing extant PACE programs. Should any State's laws with respect 
to loan originators under the SAFE Act be truly incompatible with the 
current business model for PACE, the CFPB finds it likely that the 
States will make adjustments to their laws to allow PACE lending to 
continue.
    It is possible that some home improvement contractors will opt not 
to bear the cost of complying with TILA provisions to the extent they 
apply and will instead exit the PACE market. The home improvement 
contractors themselves would incur costs in this case. The CFPB does 
not have data available to estimate these costs. The costs to home 
improvement contractors from exiting the PACE industry depend on what 
happens to prospective home improvement contracts for which PACE 
financing is no longer be an option. If contractors are able to make 
the sale of the home improvement contract based on a cash payment or 
another financial product, they generally would not experience any 
cost.\331\ However, contractors could lose some sales due to the 
unavailability of a PACE transaction as a financing option. The CFPB 
does not have data that would indicate how frequently this will happen. 
It is also possible that, if the rule enables PACE financing to expand 
into additional States, home improvement contractors in those States 
will benefit from additional business. Again, the CFPB does not have 
data that would indicate how many contractors might benefit if this 
were to occur, or how much they would benefit.
---------------------------------------------------------------------------

    \331\ The CFPB's understanding is that home improvement 
contractors do not receive a commission from PACE companies for 
originating a PACE contract. To the extent that contractors do 
receive commissions, exiting the PACE market will cost them these 
commissions, although they might be replaced by commissions from an 
alternate financial product, if any. Conversely, to the extent that 
contractors currently make payments to PACE lenders as part of 
originating a PACE loan, as currently occurs for around one sixth of 
PACE loans in California, exiting the PACE market will save 
contractors that expense.
---------------------------------------------------------------------------

    It is also possible that PACE companies may shift their business 
practices so that home improvement contractors do not explicitly 
solicit consumers for PACE transactions, but instead provide referrals 
to a PACE company to apply for a PACE transaction with the PACE company 
directly. In this case, the costs of compliance with the requirements 
of TILA and Regulation Z relating to loan originators would fall on 
PACE companies, although home improvement contractors may still 
experience costs due to this change in business model. The CFPB does 
not have data available to quantify these costs, and commenters did not 
address this possibility.
    A PACE industry trade association and a PACE government sponsor 
expressed concern that small home improvement contractors would exit 
the PACE market but did not provide specific figures on this point. 
Several home improvement contractors stated that a large fraction of 
their business is financed by PACE loans, with estimates ranging from 
35 percent to 80 percent.
    Consumers may experience both costs and benefits due to the 
application of TILA's loan originator provisions to PACE. The costs and 
benefits to consumers of not being offered a PACE transaction are 
discussed above in this analysis; that discussion also applies to cases 
where consumers are not offered a PACE transaction because the home 
improvement contractor has exited the PACE market. To the extent that 
home improvement contractors opt to remain in the PACE market or PACE 
transactions are originated by PACE companies or local governments 
directly as a result of the rule, consumers may benefit from such 
changes to the way PACE transactions are marketed. Many consumer 
protection issues identified in the comments responding to the Advance 
Notice of Proposed Rulemaking and NPRM are related in large part to 
conduct by home improvement contractors. Either mandatory compliance 
with TILA's loan originator provisions by home improvement contractors, 
or a shift to originating PACE transactions directly by PACE companies 
or local governments could ameliorate some of these issues.
    A PACE company criticized the CFPB's discussion of this issue in 
the proposal, stating that the CFPB had not specifically identified 
consumer protection issues that this aspect of the rule would solve, 
nor provided evidence that those problems exist. The CFPB discusses the 
consumer protection issues with PACE financing, including regarding the 
conduct of home improvement contractors above in part II.A. The CFPB 
acknowledges that its analysis of the costs and benefits to consumers 
of having home improvement contractors treated as loan originators 
under Regulation Z is qualitative in nature. Commenters did not provide 
any specific costs or benefits of these provisions. The CFPB's analysis 
is based on the information available, and it maintains the analysis 
stated above.
Benefits and Costs Related to PACE Loans That Are High Cost Mortgages
    Under TILA, certain additional protections apply to high-cost 
mortgages as defined by HOEPA. High-cost mortgages generally include 
those that: (1) have an APR 6.5 or 8.5 percentage points higher than 
the APOR for a comparable transaction, depending on whether it is a 
first- or subordinate-lien mortgage; (2) have points and fees exceeding 
5 percent of the total loan amount or the lesser of 8 percent of the 
total loan amount or $1,000 (adjusted annually for inflation), 
depending on the size of the transaction; or (3) include certain 
prepayment penalties.\332\ Few PACE transactions appear to have APRs 
high enough to meet the first prong,\333\ and the CFPB understands that 
more recent PACE transactions generally do not include prepayment 
penalties, although certain early PACE contracts did include prepayment 
penalties. The PACE Report finds that about 35 percent of PACE 
transactions in the data the Report studies had up-front fees exceeding 
the relevant HOEPA points-and-fees threshold.\334\ However, this varied 
sharply by State, with over half of all PACE transactions in California 
having fees exceeding the threshold, compared to just 8 percent of PACE 
transactions in Florida.\335\
---------------------------------------------------------------------------

    \332\ See TILA section 103(bb)(1)(A); 12 CFR 1026.32(a)(1).
    \333\ See PACE Report, supra note 12, at 15 (finding that 96 
percent of PACE transactions made between 2014 and 2019 had 
estimated APR-APOR spreads below 6.5 percent).
    \334\ Id. at Table 5.
    \335\ Id.
---------------------------------------------------------------------------

    Some of the requirements of HOEPA may be difficult for PACE 
companies to comply with. This could lead to PACE companies declining 
to make PACE transactions that would be high-cost mortgages. Given the 
variation in fees across States, it seems possible that PACE companies 
could make PACE transactions profitably with lower fees than they 
currently do. As a result, the CFPB expects that PACE companies will 
reduce fees or interest rates on PACE transactions that would otherwise 
exceed HOEPA thresholds rather than declining to make a PACE 
transaction at all. This will impose costs on PACE companies and the 
affiliated local

[[Page 2497]]

government entities in the form of lost revenue and will benefit PACE 
consumers by the same measure.
    A PACE company stated that it would be impossible for PACE loans to 
comply with some requirements of Regulation Z for high-cost mortgages 
as defined by HOEPA and Regulation Z. The commenter stated that the 
high-cost mortgage definition under HOEPA would function as a cap on 
loan amounts and fees.
    As discussed above in the discussion of Sec. Sec.  1026.32 and 
1026.34, high-cost PACE loans will be able to comply with the HOEPA 
requirements involving payments to home improvement contractors and 
credit counseling that one PACE company asserted would pose challenges, 
although the CFPB acknowledges these or other HOEPA requirements may 
create costs for PACE companies and home improvement contractors. In 
addition, as discussed above in this part, to the extent that HOEPA 
compliance is infeasible or cost-prohibitive, the CFPB agrees with the 
commenters that PACE companies will likely respond by adjusting loan 
terms to avoid making loans that are high-cost mortgages under HOEPA. 
This would impose costs on PACE companies and PACE creditors, and 
benefit consumers in equal measure. Given that the PACE Report shows 
that PACE companies charge significantly lower fees and have a much 
smaller share of loans that would be high-cost mortgages under HOEPA, 
for PACE loans in Florida as compared to PACE loans in California, the 
CFPB does not expect that changes in fee amounts would make PACE loans 
non-viable.
Benefits and Costs Related to PACE Loans That Are Higher-Priced 
Mortgage Loans
    PACE companies may also experience costs due to the requirements of 
Regulation Z with respect to higher-priced mortgage loans. Regulation Z 
generally requires creditors to obtain a written appraisal of the 
property to be mortgaged prior to consummating higher-priced mortgage 
loans if the amount of credit extended exceeds a certain threshold--
$32,400 in 2024--and to provide the consumer with a written copy of the 
appraisal.\336\ The PACE Report indicates that about a quarter of PACE 
transactions originated between June 2014 and December 2019 had 
original principal amounts above that threshold, and moreover shows 
that most PACE transactions have APR-APOR spreads above the threshold 
for higher-priced mortgage loans.\337\ The CFPB understands that PACE 
companies typically do not obtain written appraisals for properties 
securing PACE transactions, relying instead on automated valuation 
models. Switching to written appraisals, or lowering loan amounts to be 
under the threshold, would impose costs on PACE companies. Consumers 
will also experience costs to the extent that the price of conducting 
an appraisal is passed on to them.
---------------------------------------------------------------------------

    \336\ See generally 12 CFR 1026.35(c); comment 35(c)(2)(ii)-3.
    \337\ See PACE Report, supra note 12, at Table 2, Table 5.
---------------------------------------------------------------------------

    Several home improvement contractors expressed concern regarding 
the cost of Regulation Z with respect to higher-price mortgage loans as 
defined under TILA and Regulation Z, specifically the requirement to 
obtain an in-person appraisal for loans with initial principal above a 
certain threshold.\338\ Commenters stated that the higher-priced 
mortgage loan appraisal requirement would provide limited benefit; one 
commenter estimated that it would cost $300-500 or more. Commenters 
generally indicated that the cost of an appraisal would be passed on to 
consumers, with some home improvement contractors stating further that 
they expected to require consumers to pay this fee up front, creating 
difficulties with an origination process for PACE loans that currently 
does not require any up-front fees. One home improvement contractor 
commenter stated that the appraisal requirement would lead to a 35 
percent reduction in its business and result in layoffs. Other home 
improvement contractors stated that half of their customers would be 
unable to use PACE loans as a means of financing due to the upfront 
cost or delay resulting from the appraisal requirement.
---------------------------------------------------------------------------

    \338\ See generally 12 CFR 1026.35(c); comment 35(c)(2)(ii)-3.
---------------------------------------------------------------------------

    PACE industry stakeholders also expressed concern that the 
appraisal requirement for PACE loans meeting the definition of higher-
priced mortgage loans would be costly and unnecessary. The commenters 
cited the PACE Report, which shows that 25 percent of PACE loans had 
initial balances that would exceed the threshold to require an 
appraisal for higher-priced mortgage loans.\339\ Commenters further 
expressed concern stating that an in-person appraisal would be 
unnecessary, as PACE companies are already required by State law to 
estimate home values using multiple automated valuation models, with 
strict limits on allowable loan-to-value ratios based on those outputs.
---------------------------------------------------------------------------

    \339\ The PACE Report lists the 25th, 50th, and 75th percentiles 
for several characteristics of PACE loans originated between June 
2014 and December 2019. Coincidentally, the 75th percentile for 
original principal balance was $31,060, meaning that 25 percent of 
PACE loans in the data had higher initial balances, and 75 percent 
had lower initial balances, and essentially the same percentage 
would be above and below exactly $31,000, the threshold at the time 
of the proposal.
---------------------------------------------------------------------------

    The CFPB acknowledges that requiring an in-person appraisal for 
PACE loans that are higher-priced mortgage loans subject to the 
requirements of Sec.  1026.35(c) will impose costs on PACE companies 
and home improvement contractors, and on consumers to the extent that 
costs are passed through. As commenters noted, the PACE Report 
estimates that over 96 percent of PACE loans originated between 2014 
and 2019 would have been higher-priced mortgage loans under the 
Regulation Z definition, and about one quarter had initial balances 
high enough to be subject to the appraisal requirement.\340\ Recent 
data from State regulators and bond rating agencies indicate that 
average PACE transaction balances have increased since 2019, suggesting 
that a larger fraction would be subject to the requirement. Appraisal 
fees quoted by commenters, on the order of $400, are a reasonable 
estimate of these costs. In addition, PACE companies and home 
improvement contractors will likely incur some costs to arrange the 
appraisal, if only in staff time, beyond the direct appraisal fee. 
Commenters did not provide data or information suggesting the magnitude 
of these costs.
---------------------------------------------------------------------------

    \340\ See PACE Report, supra note 12, at Table 2 and Table 5.
---------------------------------------------------------------------------

    Although some commenters suggested that appraisals would need to be 
paid for by consumers up front, it is not clear why these fees would be 
treated differently from other fees currently associated with PACE 
loans, and commenters did not explain why this would be the case. 
Because it is currently commonplace for a variety of fees to be 
included in the initial principal balance of a PACE loan, the CFPB 
finds it most likely that any appraisal fee would also be included in 
the principal and passed on to consumers in full. As with the waiting 
period required for the TILA-RESPA integrated disclosure forms, 
discussed above, the CFPB does not expect that any delay in arranging 
an appraisal will be incompatible with the way that consumers choose 
contractors for home improvement work.
    The CFPB further acknowledges that the appraisal requirement, where 
it applies, might discourage consumers from pursuing a PACE loan. The

[[Page 2498]]

additional friction of scheduling a time with an appraiser may dissuade 
consumers from taking out a PACE loan at all. To the extent this 
occurs, PACE loans that would otherwise be above applicable thresholds 
would not occur, leading to costs for industry participants and 
potentially costs and benefits to consumers as described above in this 
part. Some home improvement contractor commenters asserted particular 
fractions of their business, such as half or 35 percent, that would be 
lost due to an appraisal requirement. The CFPB notes that the 
requirement only applies to loans with initial balance above a certain 
threshold--$32,400 in 2024--such that estimates that half or more PACE 
loans would be lost seem unlikely based on data from the PACE 
Report.\341\ Further, it is likely that some home improvement 
contractors and PACE companies will respond to the appraisal 
requirement by reducing the cost of the home improvement projects, 
whether by proposing smaller projects or charging lower prices, in 
order to reduce balances below applicable thresholds. Contractors may 
also be able to reduce the total cost of proposed projects, and thus 
the balance of any PACE transaction, by reducing or eliminating 
payments to PACE companies such as seller's points, as currently occurs 
for about one sixth of PACE loans in California. While these changes 
may impose further costs on industry participants, it seems unlikely 
that PACE loan originations would fall by as much as half solely due to 
the appraisal requirement for higher-price mortgage loans.
---------------------------------------------------------------------------

    \341\ 12 CFR 1026.35(c); comment 35(c)(2)(ii)-3. The PACE Report 
indicates the median original balance of PACE loans originated 
between June 2014 and December 2019 was $20,629, with an average of 
$25,001. Although data from bond rating companies indicates that the 
average balance has increased for more recent loans, to around 
$31,000, the median is almost certainly still substantially lower, 
given that the distribution of PACE loan original balances, like 
most installment loans, is right skewed, with a small number of very 
high balance loans that increases the average above the median. 
Given these facts, the median original balance for new PACE loans is 
almost certainly well below the threshold that would require an in-
person appraisal, such that less than half of PACE loans will be 
subject to this requirement if PACE lenders and home improvement 
contractors do not change their behavior.
---------------------------------------------------------------------------

E. Potential Specific Impacts of the Rule on Access to Credit

    As discussed above, the final rule may reduce access to PACE 
credit. Potential PACE borrowers who cannot qualify for a PACE 
transaction due to the ability-to-repay requirements will not have 
access to PACE credit. As also noted above, the PACE Report finds that 
the implementation of the 2018 California PACE Reforms, which included 
a required ability-to-pay analysis, resulted in a substantial reduction 
in new PACE transactions.\342\ Some of the decrease in California was 
likely due to increased denials of PACE applications, and some was 
likely due to reduced marketing of PACE transactions, such as reduced 
participation by home improvement contractors. However, given that 
Florida now requires PACE companies to confirm consumers' income before 
making a PACE loan, it is possible that the rule will not significantly 
reduce PACE lending beyond what has already occurred at baseline. 
Moreover, it is not clear how much of the reduction in PACE 
transactions in California was due to credit supply factors, versus 
reduced demand for PACE transactions. As discussed above, a substantial 
fraction of PACE transactions are paid off early, suggesting that at 
least some consumers who engage in a PACE transaction currently may not 
desire to have a long-term financial obligation. Some provisions of the 
rule could prompt some consumers to avoid the transaction, which would 
reduce the volume of PACE transactions, but this would be due to a 
reduction in demand for credit, not a change in access to credit. In 
addition, consumers who have a PACE application denied, or who are not 
offered an opportunity to apply for a PACE transaction, might be able 
to access other forms of credit, potentially at more favorable APRs.
---------------------------------------------------------------------------

    \342\ PACE Report, supra note 12, at 45.
---------------------------------------------------------------------------

    To the extent that the legal clarity provided by the rule enables 
PACE financing to expand into additional States, this would increase 
access to PACE credit for consumers in those States.
    The CFPB quantifies the potential impacts of the rule on access to 
credit in its discussion in part VI.D where possible. The CFPB sought 
comment on this issue in the proposal, particularly in the form of 
additional studies or data that might inform the potential impact of 
the proposal on access to credit. Commenters did not provide any 
additional information beyond the qualitative discussion summarized 
here and above. That is, commenters noted that access to PACE credit 
would be reduced but provided no specific data or figures.

F. Potential Specific Impacts on Consumers in Rural Areas and 
Depository Institutions With Less Than $10 Billion in Assets

    The rule will not have a significant impact on consumers in rural 
areas. If anything, the rule will impact consumers in rural areas less 
than consumers in non-rural areas. The PACE Report shows that consumers 
who take part in PACE transactions are less likely to live in rural 
areas than other consumers in their States. Moreover, the Report notes 
that California and Florida, the States with the most PACE lending to 
date, have the smallest and sixth-smallest rural population shares 
among all States, respectively.
    The CFPB understands that depository institutions of any size are 
not typically directly involved with PACE transactions, and thus the 
rule will have no direct impact on such entities, regardless of asset 
size.
    Commenters did not address these specific impacts.

VII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities (SISNOSE).\343\ The CFPB is also 
subject to specific additional procedures under the RFA involving 
convening a panel to consult with small business representatives before 
proposing a rule for which an IRFA is required.\344\ In the proposal, 
the CFPB determined that an IRFA was not required because the proposal, 
if finalized, would not have a SISNOSE.
---------------------------------------------------------------------------

    \343\ 5 U.S.C. 601 et seq.
    \344\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    For the reasons discussed below, the CFPB does not believe that the 
final rule will have a SISNOSE.\345\ While it is possible that the rule 
will have a significant impact on some entities, based on the 
information available it appears that most of those entities are not 
``small'' as defined by the RFA, and that any small entities that may 
be impacted, significantly or otherwise, are unlikely to constitute a 
substantial number of small entities.
---------------------------------------------------------------------------

    \345\ This analysis considers collectively the potential impacts 
of all aspects of the final rule on small entities, including both 
the affirmative new requirements and the revisions to the official 
commentary.
---------------------------------------------------------------------------

    Small entities, for purposes of the RFA, include both small 
businesses as

[[Page 2499]]

defined by the Small Business Administration (SBA), and small 
government jurisdictions, defined as jurisdictions with a population of 
less than 50,000.\346\
---------------------------------------------------------------------------

    \346\ 5 U.S.C. 601(3), 601(5).
---------------------------------------------------------------------------

    The CFPB understands that any economic impact from the rule will 
primarily fall on PACE companies, as defined under Sec.  
1026.43(b)(14). Most of these entities are private firms. A small 
number of local government entities administer their own PACE programs 
and may be affected in similar ways as PACE companies. The rule may 
also have a direct economic impact on the local government entities 
that authorize PACE programs within their jurisdictions and are parties 
to the financing agreements but do not otherwise administer the 
originations, and it may also have a direct economic impact on the home 
improvement contractors who market PACE to consumers.
    The CFPB is aware of five entities that currently are administering 
PACE programs as commonly understood, including four private firms and 
one local government entity. Based on the information available to the 
CFPB, none of these entities currently are small entities. The local 
government entity that directly originates PACE transactions has 
population greater than 50,000.\347\
---------------------------------------------------------------------------

    \347\ Sonoma County operates its own PACE program, called Sonoma 
County Energy Independence Program. Sonoma County, California had 
population 485,887 in 2021, according to the Census Bureau. See U.S. 
Census Bureau, Annual Estimates of the Resident Population for 
Counties in California: April 1, 2020 to July 1, 2021, https://www2.census.gov/programs-surveys/popest/tables/2020-2021/counties/totals/co-est2021-pop-06.xlsx.
---------------------------------------------------------------------------

    For private firms, SBA size standards differ by industry based on 
the 6-digit North American Industry Classification System (NAICS) 
industry code that represents the primary business of a firm.\348\ For 
private firms whose primary business is originating PACE transactions, 
the relevant SBA threshold is $47 million in annual receipts.\349\ The 
CFPB's understanding is that PACE companies' annual receipts for 
purposes of the SBA criteria are based on the principal balance of the 
financing obligations they originate in a given year.\350\ This is 
consistent with how PACE companies tend to describe the volume of their 
business.\351\
---------------------------------------------------------------------------

    \348\ The NAICS system is produced by a partnership between the 
Office of Management and Budget and partner agencies in Canada and 
Mexico, with the aim of providing a consistent framework for 
analyzing industry statistics.
    \349\ The SBA generally defines receipts as `` `total income' . 
. . plus `cost of goods sold', as these terms are defined and 
reported on Internal Revenue Service (IRS) tax return forms.'' The 
SBA provides that the classification should be based on a five-year 
average of receipts, with adjustments if a firm has been in business 
for less than five full fiscal years. See 13 CFR 121.104. PACE is a 
small and relatively new industry that began around 2008, and there 
is more than one 6-digit NAICS industry that could reasonably apply 
to PACE companies (the NAICS system is comprehensive, such that 
every firm should fit into exactly one 6-digit industry code). The 
6-digit NAICS industry codes that private PACE companies could 
arguably belong to include codes 522292 (Real Estate Credit), code 
522299 (International, Secondary Market, and All Other Nondepository 
Credit Intermediation), or code 523910 (Miscellaneous 
Intermediation). See U.S. Census Bureau, North American Industry 
Classification System 2022, https://www.census.gov/naics/?58967?yearbck=2022. For all these industries the SBA size threshold 
is $47 million in annual receipts. 13 CFR 121.201.
    \350\ This will somewhat undercount annual receipts, which would 
also include revenues the firms receive from the sale of PACE 
securities to the secondary market.
    \351\ See, e.g., Ygrene Energy Fund Inc., RE: Advanced Notice of 
Proposed Rulemaking on Residential Property Assessed Clean Energy 
(RIN 3170-AA84) (May 7, 2019) (describing the change in the volume 
of PACE assessments following the 2017 California PACE statute 
legislation in terms of the change in number of assessments and 
dollar value of those assessments).
---------------------------------------------------------------------------

    Based on the evidence available to the CFPB, it does not appear 
likely that any of the currently active private PACE companies averaged 
less than $47 million in annual receipts over the past five years.\352\ 
Moreover, even if some PACE companies are small entities, PACE 
companies would not represent a substantial number of the small 
entities in any of the industries they could reasonably be classified 
in, which have between hundreds and thousands of small firms.\353\ Even 
if all currently operating PACE companies were small, they would not 
represent a substantial number within any of the relevant 6-digit NAICS 
industries.
---------------------------------------------------------------------------

    \352\ Although the data used in the CFPB's PACE Report does not 
identify revenue separately by individual companies, publicly 
available data from CAEATFA indicates that the currently active PACE 
companies generally averaged over $50 million in new PACE 
transactions in California alone between 2018 and 2020. See Cal. 
Alt. Energy & Advanced Transp. Fin. Auth., PACE Loss Reserve Program 
Enrollment Activity (Mar. 2021), https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf. Moreover, the PACE Report shows that PACE 
lending in Florida exceeded that in California after 2018. 
Similarly, statistics from the PACE trade association indicate that 
the PACE industry made around $700 million in new PACE transactions 
in 2023. See PACENation, PACE Market Data (updated Dec. 31, 2023), 
https://www.pacenation.org/pace-market-data/. Even if these revenues 
were not evenly distributed among the four companies, it seems 
unlikely that any one company had revenues less than $47 million 
averaged over five years.
    \353\ The CFPB can determine the approximate number of small 
firms active in each industry through the 2017 Economic Census (the 
most recent version available at this writing), which gives counts 
of firms categorized by NAICS code and annual revenues. See U.S. 
Census Bureau, 2017 Economic Census, Finance and Insurance (NAICS 
Sector 52), Establishment and Firm Size Statistics, https://www.census.gov/data/tables/2017/econ/economic-census/naics-sector-52.html. The revenue categories in the public Economic Census data 
do not line up perfectly with the SBA size thresholds, but even 
excluding categories that overlap the threshold, the 2017 Economic 
Census indicates that there were at least 2,372 small firms in the 
Real Estate Credit industry, at least 1,725 small firms in the 
International, Secondary Market, and All Other Nondepository Credit 
Intermediation industry, at least 1,573 small firms in the All Other 
Nondepository Credit Intermediation industry and at least 6,715 in 
the Miscellaneous Intermediation industry.
---------------------------------------------------------------------------

    The CFPB also considered whether a substantial number of small 
government entities could experience a significant impact under the 
final rule. As noted above, the CFPB is only aware of one government 
entity that is currently acting as its own administrator to provide 
PACE financing as it is commonly understood, and it is not small under 
the RFA. However, other government entities authorize and oversee PACE 
programs, are parties to the financing agreements, and receive some 
revenues from the programs.\354\ To the extent that the rule could 
directly impact these other government entities, the CFPB must consider 
whether the rule will create a significant economic impact on a 
substantial number of these entities.
---------------------------------------------------------------------------

    \354\ As discussed in part VII above, the CFPB understands that 
government entities are legally the ``creditor'' for purposes of the 
TILA requirements as implemented in Regulation Z. See 12 CFR 
1026.2(a)(17). However, for programs administered by PACE companies, 
in general the CFPB does not expect significant economic impact on 
these government entities from these provisions, as the CFPB expects 
that the private PACE companies will continue to administer 
origination activity on behalf of the government entities, such that 
most of the economic burden will fall on the private entities. As 
discussed above, an exception to this would be small government 
entities running programs that are not commonly understood as PACE 
but meet the definition of PACE financing under 12 CFR 
1026.43(b)(15). Even in this case, the CFPB does not believe the 
rule would impose a significant economic impact, as such programs 
represent a small fraction of any given entity's overall revenue.
---------------------------------------------------------------------------

    As discussed above, under the RFA, government entities are small if 
they have populations of less than 50,000. Nationwide in 2020 there 
were 41,615 small government entities, including 2,153 counties, 18,709 
incorporated places, and 20,753 minor civil divisions. The 19 States 
plus the District of Columbia, which the CFPB understands currently 
have legislation authorizing PACE, contained 17,209 total small 
governments, consisting of 715 counties, 7,716 incorporated places, and 
8,778 minor civil divisions.\355\ Of these small governments, 
currently, only small governments in California, Florida, and

[[Page 2500]]

Missouri could be directly impacted by the rule in any meaningful way. 
There are exactly 2,000 small government entities in those three States 
combined, consisting of 134 counties, 1,583 incorporated places, and 
283 minor civil divisions. Even if all government entities in the three 
States were significantly impacted by the rule (which is unlikely, as 
most local governments in those States, especially those below county 
level, do not themselves sponsor PACE programs), this would be only 
about 11.6 percent of small government entities in States with active 
PACE legislation and 4.8 percent of small government entities 
nationwide, which the CFPB does not consider to be a substantial 
number. In addition, those small government entities that would be 
directly impacted by the rule are unlikely to receive a significant 
proportion of their revenue from PACE financing, such that even 
eliminating this revenue stream would not cause a significant economic 
impact.\356\
---------------------------------------------------------------------------

    \355\ The States used for this calculation are Arkansas, 
California, Colorado, Connecticut, Florida, Georgia, Illinois, 
Maine, Maryland, Minnesota, Missouri, Nebraska, New Jersey, New 
Mexico, New York, Ohio, Rhode Island, Vermont, and Wyoming.
    \356\ The CFPB understands that local government entities are 
typically funded in large part by property taxes. Although the PACE 
Report finds that PACE assessments can nearly double property tax 
payments for individual homeowners, the CFPB understands that most 
of the revenue of those payments accrues to the investors in the 
resulting PACE bonds. Moreover, the vast majority of residential 
properties in any given jurisdiction do not have PACE assessments. 
As such, revenue related to PACE received by small government 
entities will typically be a small fraction of overall revenue.
---------------------------------------------------------------------------

    The rule may impact the home improvement contractors who market and 
help originate PACE financing. Here again it appears that the rule will 
not directly impact a substantial number of small entities, even 
assuming that any small home improvement contractor will experience a 
significant economic impact. In the most recent Economic Census, there 
were more than 233,000 small entities in the relevant NAICS codes for 
home improvement contractors.\357\ By comparison, there are currently 
approximately 3,000 firms registered in California as PACE 
solicitors.\358\ Even if all of these entities are small and there were 
a similar number of small entities acting as PACE solicitors in Florida 
and Missouri, this would be less than 3 percent of all relevant small 
entities, and so not a substantial number.\359\
---------------------------------------------------------------------------

    \357\ Home improvement contractors that serve as solicitors for 
PACE fall under NAICS industry codes 236118, (``Residential 
Remodelers''), 238150 (``Glass and glazing contractors''), 238160 
(``Roofing contractors''), 238170 (``Siding Contractors''), 238210 
(``Electrical contractors''), and 238220 (``Plumbing, heating, and 
air-conditioning contractors''). See U.S. Census Bureau, North 
American Industry Classification System 2022, https://www.census.gov/naics/?58967?yearbck=2022. The relevant SBA threshold 
for industry 236118 is $45 million per year in annual receipts; for 
the other industries the threshold is $19 million. 13 CFR 121.201. 
According to the 2017 Economic Census, these industries had at least 
70,000, 4,600, 14,000, 6,000, 58,000, and 81,000 small entities, 
respectively. See U.S. Census Bureau, 2017 Economic Census, 
Construction (NAICS Sector 23), Establishment and Firm Size 
Statistics, https://www.census.gov/data/tables/2017/econ/economic-census/naics-sector-23.html. The Economic Census data does not 
disaggregate firm counts by State at the 6-digit NAICS level.
    \358\ See Cal. Dep't of Fin. Prot. & Innovation, Enrolled PACE 
Solicitors Search, https://dfpi.ca.gov/regulated-industries/property-assessed-clean-energy-pace-program-administrators/enrolled-pace-solicitors-search/ (last updated Dec. 4, 2024), for 
California's database of solicitors, however note that many 
companies are duplicated to the extent they are enrolled with 
multiple PACE companies. California law and regulation defines a 
``PACE solicitor'' as a person authorized by a program administrator 
to solicit a property owner to enter into an assessment contract. 
Cal. Fin. Code sec. 22017(a); see also 10 Cal. Code Regs. sec. 
1620.02(f).
    \359\ Limiting consideration to contractors operating in States 
with PACE legislation is not appropriate in this case. Unlike local 
governments, contractors can and do operate across State lines, so 
contractors currently operating in non-PACE States could possibly be 
affected by the final rule. As a result, it makes sense to consider 
all home improvement contractors as part of the total for purposes 
of the ``substantial number'' calculation. In addition, the Economic 
Census does not provide industry-level data disaggregated by State 
in a way that would allow the CFPB to determine the number of firms 
by industry and annual revenue.
---------------------------------------------------------------------------

    Some home improvement contractors stated that they disagreed with 
the CFPB's preliminary decision to certify that the proposal would not 
have a SISNOSE. These commenters did not provide any specific details 
challenging the RFA analysis in the proposed rule, such as the number 
of home improvement contractors who would be affected by the rule. 
Similarly, a home improvement contractor trade association and a PACE 
government sponsor stated that the CFPB lacked data on costs to home 
improvement contractors in the proposal, although again these 
commenters did not provide any specific data as to home improvement 
contractor costs.
    The CFPB acknowledges that limited information is available as to 
the costs of the rule for small home improvement contractors. However, 
as discussed above this is not dispositive--even assuming that every 
small home improvement contractor who is impacted by the rule 
experiences a significant impact, this would not constitute a 
substantial number of small entities. As such, for purposes of the RFA, 
the specific costs to impacted small home improvement contractors would 
not create significant impact on a substantial number of small 
entities. The CFPB discusses some costs to home improvement 
contractors, small and otherwise, in part VI above.
    PACE industry stakeholders also stated that they disagreed with the 
CFPB's decision to certify that the proposal would not have a SISNOSE. 
One PACE company stated that the CFPB should have obtained more 
specific information on NAICS codes and revenues for PACE companies to 
determine whether these entities were small businesses as defined by 
the RFA. However, this commenter did not share its own NAICS code nor 
its annual revenue, or include other relevant data. Another PACE 
company stated that there were additional costs to small government 
entities beyond those described above but did not specify what those 
costs were. A third PACE company asserted that the CFPB only considered 
costs to home improvement contractors, ignoring impacts on PACE 
companies and local governments. This commenter further stated that 
currently active PACE companies are all small businesses although the 
commenter did not provide any information to support that claim.
    The CFPB reiterates that, for purposes of the RFA, a PACE company 
would only be a small business if it meets the SBA's size standards for 
its industry, which would entail average annual revenues of less than 
$47 million over a five year period. Commenters did not dispute the 
CFPB's conclusion that the total dollar amount of PACE loans originated 
was an appropriate measure of revenue, nor that the existing PACE 
lenders had revenue above $47 million by that metric.
    The SBA Office of Advocacy provided a comment letter to the CFPB in 
response to the proposed rule as well. This letter raised questions 
about the basis of the CFPB's SISNOSE determination. The SBA Office of 
Advocacy asserted that the CFPB used the incorrect denominator for 
determining whether a substantial number of small entities would be 
affected by the rule. Specifically, the SBA Office of Advocacy stated 
that the CFPB should have limited its consideration of home improvement 
contractors to those who participate in PACE financing, rather than all 
home improvement contractors. The SBA Office of Advocacy similarly 
asserted that the CFPB should have compared the number of small PACE 
companies, if any, to the PACE financing industry only, and the number 
of small government entities affected to the number of small government 
entities only in the three states where residential PACE financing was 
available at the time of the proposal. A

[[Page 2501]]

PACE company made a similar comment with respect to the choice of 
comparison groups. The SBA Office of Advocacy also asserted that the 
CFPB had not conducted a ``threshold analysis'' as part of its RFA 
analysis. Echoing comments from the home improvement industry described 
above, the SBA Office of Advocacy letter raised questions about the 
lack of data on costs to home improvement contractors in the proposal.
    The CFPB does not agree with the suggested methodological approach 
with respect to the denominator for determining whether a substantial 
number of small entities are impacted by the rule. The CFPB agrees that 
agencies should consider only firms that are actively participating in 
the relevant industry, as opposed to those which are nominally 
registered or tangentially participating. However, the CFPB has 
determined that the relevant industry for the affected entities is not 
limited to entities engaging in PACE financing, and the final rule 
would not have a substantial impact on a significant number of firms in 
the relevant industries.
    With respect to home improvement contractors, considering the 
industry to only include contractors acting as solicitors for PACE 
companies would be inappropriate, as these contractors are not a 
distinct market from other home improvement contractors. These 
contractors compete in the home remodeling market with home improvement 
contractors who do not offer PACE. Indeed, this is one reason that 
industry commenters offered for why the rule would be burdensome--that 
contractors offering PACE financing to potential customers would find 
it more difficult to compete with home improvement contractors who do 
not offer financing or who offer other types of financing.
    Further, although the CFPB includes all registered PACE solicitors 
as part of the numerator in its analysis, in fact many of these firms 
likely are not active participants in marketing PACE financing. Data 
indicates that there were more PACE solicitors registered in California 
than there were PACE loans in 2023.\360\ Given that some home 
improvement contractor commenters indicated that large fractions of 
their business were funded by PACE loans (presumably indicating 
multiple loans per year), this means that many registered PACE 
solicitors are not actively involved in the market. The CFPB includes 
these firms as part of the numerator in its analysis to err toward 
finding a larger share of impacted small entities; nonetheless it does 
not find that a substantial number of small home improvement 
contractors would be impacted by the rule. By extension, the CFPB does 
not find that a substantial number of small home improvement 
contractors would experience a significant impact.
---------------------------------------------------------------------------

    \360\ See Cal. State Treasurer, Property Assessed Clean Energy 
(PACE) Loss Reserve Program, https://www.treasurer.ca.gov/caeatfa/pace/activity.asp (indicating 2,373 PACE loans originated in 
California in 2023) see also Cal. Dep't of Fin. Prot. & Innovation, 
Enrolled PACE Solicitors Search (updated Oct. 8, 2024), https://dfpi.ca.gov/pace-program-administrators/pace-solicitor-search/?emrc=63ee970c63d06 (showing 2,891 enrolled PACE solicitor 
companies).
---------------------------------------------------------------------------

    Similarly, the CFPB does not agree that the relevant comparison 
group for small government entities should have been further limited to 
small government entities in States where PACE is currently available. 
The relevant ``industry'' in this context is local governments with 
property taxing authority which arguably includes all such small 
government entities nationwide. The CFPB also notes that even within 
the States with active PACE programs, the vast majority of small 
government entities will not be affected by the rule. PACE programs are 
almost exclusively authorized by counties or government conglomerates 
(most of which are not small as defined by the RFA), such that the rule 
generally will not have any impact on most incorporated places or minor 
civil divisions. Small county governments only represent about 7 
percent of small government entities in states with active PACE 
programs. Even if all small county governments in the States with 
active programs experienced a significant impact due to the rule 
(which, as discussed above, the CFPB does not expect to be the case) 
and the CFPB limited the denominator to small government entities in 
California, Florida and Missouri, the rule still would not impose a 
significant impact on a substantial number of small government 
entities.
    Accordingly, the Director hereby certifies that this rule will not 
have a significant economic impact on a substantial number of small 
entities. Thus, neither an IRFA nor a small business review panel was 
required for the proposal, and a FRFA is not required for this final 
rule.

VIII. Paperwork Reduction Act

    The information collections contained within TILA and Regulation Z 
are approved under OMB Control Number 3170-0015. The current expiration 
date for this approval is May 31, 2026. The CFPB has determined that 
this rule does not impose any new information collections or revise any 
existing recordkeeping, reporting, or disclosure requirements on 
covered entities or members of the public that would be collections of 
information requiring approval by the Office of Management and Budget 
under the Paperwork Reduction Act.

IX. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the CFPB will submit a report containing this rule and other required 
information to the U.S. Senate, the U.S. House of Representatives, and 
the Comptroller General of the United States at least 60 days prior to 
the rule's published effective date. The Office of Information and 
Regulatory Affairs has designated this rule as a ``major rule'' as 
defined by 5 U.S.C. 804(2).

X. Severability

    The CFPB proposed the following statement regarding severability 
and received no comments. The CFPB is finalizing as proposed.
    If any provision of this rule, or any application of a provision, 
is stayed or determined to be invalid, the remaining provisions or 
applications are severable and shall continue in effect.

List of Subjects in 12 CFR Part 1026

    Advertising. Banks, banking, Consumer protection, Credit, Credit 
unions, Mortgages, National banks, Reporting and recordkeeping 
requirements, Savings associations, Truth-in-lending.

Authority and Issuance

    For the reasons set forth in the preamble, the CFPB amends 
Regulation Z, 12 CFR part 1026, as follows:

PART 1026--TRUTH IN LENDING ACT (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority:  12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 
3354, 5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Section 1026.35(b)(2)(i) is amended by adding paragraph (E) to read 
as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
* * * * *

[[Page 2502]]

    (E) A PACE transaction, as defined in Sec.  1026.43(b)(15).
* * * * *

0
3. Section 1026.37 is amended by adding paragraph (p) to read as 
follows:


Sec.  1026.37  Content of disclosures for certain mortgage transactions 
(Loan Estimate).

* * * * *
    (p) PACE transactions. For PACE transactions as defined in Sec.  
1026.43(b)(15), the creditor must comply with the requirements of this 
section with the following modifications:
    (1) Itemization. (i) In lieu of the information required by 
paragraph (c)(2)(ii) of this section, the maximum amount payable for 
any fees or other amounts corresponding to the periodic payment for the 
PACE transaction that are not disclosed pursuant to paragraph (c)(2)(i) 
of this section, labeled ``Fees or Other Amounts.'' The amount 
disclosed under this paragraph (p)(1)(i) of this section must be 
included in the calculation under paragraph (c)(2)(iv) of this section 
in place of the amount disclosed under paragraph (c)(2)(ii) of this 
section.
    (ii) The creditor shall not disclose the information in paragraph 
(c)(2)(iii) of this section.
    (2) Taxes, insurance, and assessments. The creditor shall disclose:
    (i) In lieu of the information required by paragraph (c)(4)(iv) of 
this section, a statement of whether the amount disclosed pursuant to 
paragraph (c)(4)(ii) of this section includes payments for the PACE 
transaction, labeled ``PACE Payment''; payments for other property 
taxes, labeled ``Property Taxes (not including PACE loan)''; amounts 
identified in Sec.  1026.4(b)(8); and other amounts described in 
paragraph (c)(4)(ii) of this section, along with a description of any 
such other amounts.
    (ii) In lieu of the information required by paragraph (c)(4)(v) and 
(vi) of this section, a statement that the PACE transaction, described 
as a ``PACE loan,'' will be part of the property tax payment, a 
statement that, if the consumer has a pre-existing mortgage with an 
escrow account, the PACE loan will increase the consumer's escrow 
payment, and a statement directing the consumer to contact the 
consumer's mortgage servicer for what the consumer will owe and when.
    (3) Contact information. In addition to the information required in 
paragraphs (k)(1) through (3) of this section, the creditor shall 
disclose the name, NMLSR ID (labeled ``NMLS ID/License ID''), email 
address, and telephone number of the PACE company (labeled ``PACE 
Company''). In the event the PACE company has not been assigned an 
NMLSR ID, the creditor shall disclose the license number or other 
unique identifier issued by the applicable jurisdiction or regulating 
body with which the PACE company is licensed and/or registered, with 
the abbreviation for the State of the applicable jurisdiction or 
regulatory body stated before the word ``License'' in the label, if 
any.
    (4) Assumption. In lieu of the statement required by paragraph 
(m)(2) of this section, a statement that, if the consumer sells the 
property, the buyer or the buyer's mortgage lender may require the 
consumer to pay off the PACE transaction, using the term ``PACE loan'' 
as a condition of the sale, labeled ``Selling the Property.''
    (5) Late Payment. In lieu of the statement required by paragraph 
(m)(4) of this section:
    (i) A statement detailing any charge specific to the transaction 
that may be imposed for a late payment, stated as a dollar amount or 
percentage charge of the late payment amount, and the number of days 
that a payment must be late to trigger the late payment fee, labeled 
``Late payment,'' and
    (ii) For any charge that is not specific to the transaction:
    (A) A statement that, if the consumer's property tax payment is 
late, the consumer may be subject to penalties and late fees 
established by the consumer's property tax collector, and directing the 
consumer to contact the consumer's property tax collector for more 
information, or
    (B) A statement describing any charges that may result from 
property tax delinquency that are not specific to the PACE transaction. 
The statement may include dollar amounts or percentage charges and the 
number of days that a payment must be late to trigger the late payment 
fee.
    (6) Servicing. In lieu of the statement required by paragraph 
(m)(6) of this section, a statement that the consumer will pay the PACE 
transaction, using the term ``PACE loan,'' as part of the consumer's 
property tax payment, and a statement directing the consumer, if the 
consumer has a mortgage with an escrow account that includes the 
consumer's property tax payments, to contact the consumer's mortgage 
servicer for what the consumer will owe and when.
    (7) Exceptions--(i) Unit-period. Wherever form H-24(H) of appendix 
H to this part uses ``annual'' to describe the frequency of any 
payments or the applicable unit-period, the creditor shall use the 
appropriate term to reflect the transaction's terms, such as semi-
annual payments.
    (ii) PACE nomenclature. Wherever this section requires disclosure 
of the word ``PACE'' or form H-24(H) of appendix H to this part uses 
the term ``PACE,'' the creditor may substitute the name of a specific 
PACE financing program that will be recognizable to the consumer.

0
4. Section 1026.38 is amended by adding paragraph (u) to read as 
follows:


Sec.  1026.38  Content of disclosures for certain mortgage transactions 
(Closing Disclosure).

* * * * *
    (u) PACE transactions. For PACE transactions as defined in Sec.  
1026.43(b)(15), the creditor must comply with the requirements of this 
section with the following modifications:
    (1) Transaction information. In addition to the other disclosures 
required under paragraph (a)(4) of this section under the heading 
``Transaction Information,'' the creditor shall disclose the name of 
any PACE company involved in the transaction, labeled ``PACE Company.'' 
For purposes of this paragraph (u)(1), ``PACE company'' has the same 
meaning as in Sec.  1026.43(b)(14).
    (2) Projected payments. The creditor shall disclose the information 
required by paragraph (c)(1) of this section as modified by Sec.  
1026.37(p)(1) and (2) and shall omit the information required by 
paragraph (c)(2) of this section.
    (3) Assumption. In lieu of the information required by paragraph 
(l)(1) of this section, the creditor shall use the subheading ``Selling 
the Property'' and disclose the information required by Sec.  
1026.37(p)(4).
    (4) Late payment. In lieu of the information required by paragraph 
(l)(3) of this section, under the subheading ``Late Payment,'' the 
creditor shall disclose the information required by Sec.  
1026.37(p)(5).
    (5) Partial payment policy. In lieu of the information required by 
paragraph (l)(5) of the section, under the subheading ``Partial 
Payment,'' the creditor shall disclose a statement directing the 
consumer to contact the mortgage servicer about the partial payment 
policy for the account if the consumer has a mortgage with an escrow 
account for property taxes and to contact the tax collector about the 
tax collector's partial payment policy if the consumer pays property 
taxes directly to the tax authority.
    (6) Escrow account. The creditor shall not disclose the information 
required by paragraph (l)(7) of this section.

[[Page 2503]]

    (7) Liability after foreclosure or tax sale. The creditor shall not 
disclose the information required by paragraph (p)(3) of this section. 
If the consumer may be responsible for any deficiency after foreclosure 
or tax sale under applicable State law, the creditor shall instead 
disclose a brief statement that, if the property is sold through 
foreclosure or tax sale and the sale does not cover the amount owed on 
the PACE obligation, the consumer may be liable for some portion of the 
unpaid balance under State law, and a statement that the consumer may 
want to consult an attorney for additional information, under the 
subheading ``Liability after Foreclosure or Tax Sale.''
    (8) Contact information. The creditor shall disclose the 
information described in paragraph (r)(1)-(7) of this section for the 
PACE company, as defined in Sec.  1026.43(b)(14) (under the subheading 
``PACE Company'').
    (9) Exceptions--(i) Unit-period. Wherever form H-25(K) of appendix 
H to this part uses ``annual'' to describe the frequency of any 
payments or the applicable unit-period, the creditor shall use the 
appropriate term to reflect the transaction's terms, such semi-annual 
payments.
    (ii) PACE nomenclature. (A) Wherever this section requires 
disclosure of the word ``PACE'' or form H-25(K) of appendix H to this 
part uses the term ``PACE,'' the creditor may substitute the name of a 
specific PACE financing program that will be recognizable to the 
consumer.
    (B) In disclosing the information required under paragraph (p)(2) 
of this section, the creditor shall use the term ``PACE contract 
documents'' to refer to the appropriate loan document and security 
instrument.

0
5. Section 1026.41 is amended by adding paragraph (e)(7) to read as 
follows:


Sec.  1026.41  Periodic statements for residential mortgage loans.

* * * * *
    (e) * * *
    (7) PACE transactions. PACE transactions, as defined in Sec.  
1026.43(b)(15), are exempt from the requirements of this section.
* * * * *

0
6. Section 1026.43 is amended by adding paragraphs (b)(14) and (15), 
and paragraph (i) to read as follows:


Sec.  1026.43  Minimum standards for transactions secured by a 
dwelling.

* * * * *
    (b) * * *
    (14) PACE company means a person, other than a natural person or a 
government unit, that administers the program through which a consumer 
applies for or obtains a PACE transaction.
    (15) PACE transaction means financing to cover the costs of home 
improvements that results in a tax assessment on the real property of 
the consumer.
* * * * *
    (i) PACE transactions. (1) For PACE transactions extended to 
consumers who pay their property taxes through an escrow account, in 
making the repayment ability determination required under paragraph 
(c)(1) and (2) of this section, a creditor must consider the factors 
identified in paragraphs (c)(2)(i) through (viii) of this section and 
also must consider any monthly payments that the creditor knows or has 
reason to know the consumer will have to pay into any escrow account as 
a result of the PACE transaction that are in excess of the monthly 
payment amount considered under paragraph (c)(2)(iii) of this section, 
taking into account:
    (i) The cushion of one-sixth (\1/6\) of the estimated total annual 
payments attributable to the PACE transaction from the escrow account 
that the servicer may charge under Sec.  1024.17(c)(1) of this chapter, 
unless the creditor reasonably expects that no such cushion will be 
required or unless the creditor reasonably expects that a different 
cushion amount will be required, in which case the creditor must use 
that amount; and
    (ii) If the timing for when the servicer is expected to learn of 
the PACE transaction is likely to result in a shortage or deficiency in 
the consumer's escrow account, the expected effect of any such shortage 
or deficiency on the monthly payment that the consumer will be required 
to pay into the consumer's escrow account.
    (2) Notwithstanding paragraphs (e)(2), (e)(5), (e)(7), or (f) of 
this section, a PACE transaction is not a qualified mortgage as defined 
in this section.
    (3) For a PACE transaction, the requirements of this section apply 
to both the creditor and any PACE company that is substantially 
involved in making the credit decision. A PACE company is substantially 
involved in making the credit decision if it, as to a particular 
consumer, makes the credit decision, makes a recommendation as to 
whether to extend credit, or applies criteria used in making the credit 
decision. In the case of any failure by any such PACE company to comply 
with any requirement imposed under this section, section 130 of the 
Truth in Lending Act, 15 U.S.C. 1640, shall be applied with respect to 
any such failure by substituting ``PACE company'' for ``creditor'' each 
place such term appears in each such subsection.

0
7. Appendix H to part 1026 is amended by adding Model Forms H-24(H), H-
25(K), H-28(K), and H-28(L) to read as follows:

Appendix H to Part 1026--Closed-End Model Forms and Clauses

* * * * *
BILLING CODE 4810-AM-P

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BILLING CODE 4810-AM-C
* * * * *

0
8. Supplement I to Part 1026--Official Interpretations is amended by:
0
a. Under Section 1026.2--Definitions and Rules of Construction, 
revising 2(a)(14) Credit;
0
b. Under Section 1026.37--Content of disclosures for certain mortgage 
transactions (Loan Estimate), add (p) PACE transactions at the end of 
the section;
0
c. Under Section 1026.38--Content of disclosures for certain mortgage 
transactions (Closing Disclosure), add 38(u)--PACE transactions;
0
d. Under Section 1026.43--Minimum standards for transactions secured by 
a dwelling;
0
i. Revising 43(b)(8) Mortgage-related obligations;
0
ii. Adding 43(b)(14) PACE company;
0
iii. Revising Paragraph 43(c)(2)(iv);
0
iv. Revising 43(c)(3) Verification using third-party records, and
0
e. Under Appendix H-Closed-End Forms and Clauses revising paragraph 30.

[[Page 2546]]

    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Section 1026.2--Definitions and Rules of Construction

* * * * *

2(a)(14) Credit

    1. Exclusions. The following situations are not considered 
credit for purposes of the regulation:
    i. Layaway plans, unless the consumer is contractually obligated 
to continue making payments. Whether the consumer is so obligated is 
a matter to be determined under applicable law. The fact that the 
consumer is not entitled to a refund of any amounts paid towards the 
cash price of the merchandise does not bring layaways within the 
definition of credit.
    ii. Involuntary tax liens, involuntary tax assessments, court 
judgments, and court approvals of reaffirmation of debts in 
bankruptcy. However, third-party financing of such obligations (for 
example, a bank loan obtained to pay off an involuntary tax lien) is 
credit for purposes of the regulation.
    iii. Insurance premium plans that involve payment in 
installments with each installment representing the payment for 
insurance coverage for a certain future period of time, unless the 
consumer is contractually obligated to continue making payments.
    iv. Home improvement transactions that involve progress 
payments, if the consumer pays, as the work progresses, only for 
work completed and has no contractual obligation to continue making 
payments.
    v. Borrowing against the accrued cash value of an insurance 
policy or a pension account, if there is no independent obligation 
to repay.
    vi. Letters of credit.
    vii. The execution of option contracts. However, there may be an 
extension of credit when the option is exercised, if there is an 
agreement at that time to defer payment of a debt.
    viii. Investment plans in which the party extending capital to 
the consumer risks the loss of the capital advanced. This includes, 
for example, an arrangement with a home purchaser in which the 
investor pays a portion of the downpayment and of the periodic 
mortgage payments in return for an ownership interest in the 
property, and shares in any gain or loss of property value.
    ix. Mortgage assistance plans administered by a government 
agency in which a portion of the consumer's monthly payment amount 
is paid by the agency. No finance charge is imposed on the subsidy 
amount, and that amount is due in a lump-sum payment on a set date 
or upon the occurrence of certain events. (If payment is not made 
when due, a new note imposing a finance charge may be written, which 
may then be subject to the regulation.)
    2. Payday loans; deferred presentment. Credit includes a 
transaction in which a cash advance is made to a consumer in 
exchange for the consumer's personal check, or in exchange for the 
consumer's authorization to debit the consumer's deposit account, 
and where the parties agree either that the check will not be cashed 
or deposited, or that the consumer's deposit account will not be 
debited, until a designated future date. This type of transaction is 
often referred to as a ``payday loan'' or ``payday advance'' or 
``deferred-presentment loan.'' A fee charged in connection with such 
a transaction may be a finance charge for purposes of Sec.  1026.4, 
regardless of how the fee is characterized under State law. Where 
the fee charged constitutes a finance charge under Sec.  1026.4 and 
the person advancing funds regularly extends consumer credit, that 
person is a creditor and is required to provide disclosures 
consistent with the requirements of Regulation Z. (See Sec.  
1026.2(a)(17).)
    3. Transactions on the asset features of prepaid accounts when 
there are insufficient or unavailable funds. Credit includes 
authorization of a transaction on the asset feature of a prepaid 
account as defined in Sec.  1026.61 where the consumer has 
insufficient or unavailable funds in the asset feature of the 
prepaid account at the time the transaction is authorized to cover 
the amount of the transaction. It also includes settlement of a 
transaction on the asset feature of a prepaid account where the 
consumer has insufficient or unavailable funds in the asset feature 
of the prepaid account at the time the transaction is settled to 
cover the amount of the transaction. This includes a transaction 
where the consumer has sufficient or available funds in the asset 
feature of a prepaid account to cover the amount of the transaction 
at the time the transaction is authorized but insufficient or 
unavailable funds in the asset feature of the prepaid account to 
cover the transaction amount at the time the transaction is settled. 
See Sec.  1026.61 and related commentary on the applicability of 
this regulation to credit that is extended in connection with a 
prepaid account.
* * * * *

Section 1026.37--Content of Disclosures for Certain Mortgage 
Transactions (Loan Estimate)

* * * * *

37(p) PACE Transactions

37(p)(5) Late Payment

    1. For purposes of Sec.  1026.37(p)(5), a charge is specific to 
the PACE transaction if the property tax collector does not impose 
the same charges for general property tax delinquencies.

37(p)(7) Exceptions

37(p)(7)(ii) PACE Nomenclature

    1. Wherever Sec.  1026.37 requires disclosure of the word 
``PACE'' or form H-24(H) of appendix H uses the term ``PACE,'' Sec.  
1026.37(p)(7)(ii) permits a creditor to substitute the name of a 
specific PACE financing program that will be recognizable to the 
consumer in lieu of the term ``PACE.'' The name of a specific PACE 
financing program will not be recognizable to the consumer unless it 
is used consistently in financing documents for the PACE transaction 
and any marketing materials provided to the consumer. For example, 
if the name XYZ Financing is used in marketing materials and 
financing documents for the PACE transaction provided to the 
consumer, such that XYZ Financing will be recognizable to the 
consumer, the creditor may substitute the name XYZ Financing for 
PACE on the Loan Estimate.

Section 1026.38--Content of Disclosures for Certain Mortgage 
Transactions (Closing Disclosure)

* * * * *

38(u)--PACE Transactions

38(u)(9) Exceptions

38(u)(9)(ii)(A) PACE Nomenclature

    1. Wherever Sec.  1026.38 requires disclosure of the word 
``PACE'' or form H-25(K) of appendix H uses the term ``PACE,'' Sec.  
1026.38(u)(9)(ii)(A) permits a creditor to substitute the name of a 
specific PACE financing program that will be recognizable to the 
consumer in lieu of the term ``PACE.'' The name of a specific PACE 
financing program will not be recognizable to the consumer unless it 
is used consistently in financing documents for the PACE transaction 
and any marketing materials provided to the consumer. For example, 
if the name XYZ Financing is used in marketing materials and 
financing documents provided to the consumer for the PACE 
transaction, such that XYZ Financing will be recognizable to the 
consumer, the creditor may substitute the name XYZ Financing for 
PACE on the Closing Disclosure.
* * * * *

Section 1026.43-Minimum Standards for Transactions Secured by a 
Dwelling

* * * * *

43(b)(8) Mortgage-Related Obligations

    1. General. Section 1026.43(b)(8) defines mortgage-related 
obligations, which must be considered in determining a consumer's 
ability to repay pursuant to Sec.  1026.43(c). Section 1026.43(b)(8) 
includes, in the evaluation of mortgage-related obligations, fees 
and special assessments owed to a condominium, cooperative, or 
homeowners association. Section 1026.43(b)(8) includes ground rent 
and leasehold payments in the definition of mortgage-related 
obligations. See commentary to Sec.  1026.43(c)(2)(v) regarding the 
requirement to take into account any mortgage-related obligations 
for purposes of determining a consumer's ability to repay.
    2. Property taxes. Section 1026.43(b)(8) includes property taxes 
in the evaluation of mortgage-related obligations. Obligations that 
are related to the ownership or use of real property and paid to a 
taxing authority, whether on a monthly, quarterly, annual, or other 
basis, are property taxes for purposes of Sec.  1026.43(b)(8). 
Section 1026.43(b)(8) includes obligations that are equivalent to 
property taxes, even if such obligations are not denominated as 
``taxes.'' For example, governments may establish or allow 
independent districts with the authority to impose levies on 
properties within the

[[Page 2547]]

district to fund a special purpose, such as a local development bond 
district, water district, or other public purpose. These levies may 
be referred to as taxes, assessments, surcharges, or by some other 
name. For purposes of Sec.  1026.43(b)(8), these are property taxes 
and are included in the determination of mortgage-related 
obligations. Any payments for pre-existing PACE transactions are 
considered property taxes for purposes of Sec.  1026.43(b)(8).
    3. Insurance premiums and similar charges. Section 1026.43(b)(8) 
includes in the evaluation of mortgage-related obligations premiums 
and similar charges identified in Sec.  1026.4(b)(5), (7), (8), or 
(10) that are required by the creditor. This includes all premiums 
or charges related to coverage protecting the creditor against a 
consumer's default, credit loss, collateral loss, or similar loss, 
if the consumer is required to pay the premium or charge. For 
example, if Federal law requires flood insurance to be obtained in 
connection with the mortgage loan, the flood insurance premium is a 
mortgage-related obligation for purposes of Sec.  1026.43(b)(8). 
Section 1026.43(b)(8) does not include premiums or similar charges 
identified in Sec.  1026.4(b)(5), (7), (8), or (10) that are not 
required by the creditor and that the consumer purchases 
voluntarily. For example:
    i. If a creditor does not require earthquake insurance to be 
obtained in connection with the mortgage loan, but the consumer 
voluntarily chooses to purchase such insurance, the earthquake 
insurance premium is not a mortgage-related obligation for purposes 
of Sec.  1026.43(b)(8).
    ii. If a creditor requires a minimum amount of coverage for 
homeowners' insurance and the consumer voluntarily chooses to 
purchase a more comprehensive amount of coverage, the portion of the 
premium allocated to the required minimum coverage is a mortgage-
related obligation for purposes of Sec.  1026.43(b)(8), while the 
portion of the premium allocated to the more comprehensive coverage 
voluntarily purchased by the consumer is not a mortgage-related 
obligation for purposes of Sec.  1026.43(b)(8).
    iii. If the consumer purchases insurance or similar coverage not 
required by the creditor at consummation without having requested 
the specific non-required insurance or similar coverage and without 
having agreed to the premium or charge for the specific non-required 
insurance or similar coverage prior to consummation, the premium or 
charge is not voluntary for purposes of Sec.  1026.43(b)(8) and is a 
mortgage-related obligation.
    4. Mortgage insurance, guarantee, or similar charges. Section 
1026.43(b)(8) includes in the evaluation of mortgage-related 
obligations premiums or charges protecting the creditor against the 
consumer's default or other credit loss. This includes all premiums 
or similar charges, whether denominated as mortgage insurance, 
guarantee, or otherwise, as determined according to applicable State 
or Federal law. For example, monthly ``private mortgage insurance'' 
payments paid to a non-governmental entity, annual ``guarantee fee'' 
payments required by a Federal housing program, and a quarterly 
``mortgage insurance'' payment paid to a State agency administering 
a housing program are all mortgage-related obligations for purposes 
of Sec.  1026.43(b)(8). Section 1026.43(b)(8) includes these charges 
in the definition of mortgage-related obligations if the creditor 
requires the consumer to pay them, even if the consumer is not 
legally obligated to pay the charges under the terms of the 
insurance program. For example, if a mortgage insurance program 
obligates the creditor to make recurring mortgage insurance 
payments, and the creditor requires the consumer to reimburse the 
creditor for such recurring payments, the consumer's payments are 
mortgage-related obligations for purposes of Sec.  1026.43(b)(8). 
However, if a mortgage insurance program obligates the creditor to 
make recurring mortgage insurance payments, and the creditor does 
not require the consumer to reimburse the creditor for the cost of 
the mortgage insurance payments, the recurring mortgage insurance 
payments are not mortgage-related obligations for purposes of Sec.  
1026.43(b)(8).
    5. Relation to the finance charge. Section 1026.43(b)(8) 
includes in the evaluation of mortgage-related obligations premiums 
and similar charges identified in Sec.  1026.4(b)(5), (7), (8), or 
(10) that are required by the creditor. These premiums and similar 
charges are mortgage-related obligations regardless of whether the 
premium or similar charge is excluded from the finance charge 
pursuant to Sec.  1026.4(d). For example, a premium for insurance 
against loss or damage to the property written in connection with 
the credit transaction is a premium identified in Sec.  
1026.4(b)(8). If this premium is required by the creditor, the 
premium is a mortgage-related obligation pursuant to Sec.  
1026.43(b)(8), regardless of whether the premium is excluded from 
the finance charge pursuant to Sec.  1026.4(d)(2).
* * * * *

43(b)(14) PACE Company

    1. Indicia of whether a person administers a PACE financing 
program for purposes of Sec.  1026.43(b)(14) include, for example, 
marketing PACE financing to consumers, developing or implementing 
policies and procedures for the origination process, being 
substantially involved in making a credit decision, or extending an 
offer to the consumer.

43(c) Repayment Ability

* * * * *

43(c)(2) Basis for Determination

* * * * *

Paragraph 43(c)(2)(iv)

    1. Home equity lines of credit. For purposes of Sec.  
1026.43(c)(2)(iv), a simultaneous loan includes any covered 
transaction or home equity line of credit (HELOC) subject to Sec.  
1026.40 that will be made to the same consumer at or before 
consummation of the covered transaction and secured by the same 
dwelling that secures the covered transaction. A HELOC that is a 
simultaneous loan that the creditor knows or has reason to know 
about must be considered as a mortgage obligation in determining a 
consumer's ability to repay the covered transaction even though the 
HELOC is not a covered transaction subject to Sec.  1026.43. See 
Sec.  1026.43(a) discussing the scope of this section. 
``Simultaneous loan'' is defined in Sec.  1026.43(b)(12). For 
further explanation of ``same consumer,'' see comment 43(b)(12)-2.
    2. Knows or has reason to know. In determining a consumer's 
repayment ability for a covered transaction under Sec.  
1026.43(c)(2), a creditor must consider the consumer's payment 
obligation on any simultaneous loan that the creditor knows or has 
reason to know will be or has been made at or before consummation of 
the covered transaction. For example, where a covered transaction is 
a home purchase loan, the creditor must consider the consumer's 
periodic payment obligation for any ``piggyback'' second-lien loan 
that the creditor knows or has reason to know will be used to 
finance part of the consumer's down payment. The creditor complies 
with this requirement where, for example, the creditor follows 
policies and procedures that are designed to determine whether at or 
before consummation the same consumer has applied for another credit 
transaction secured by the same dwelling. To illustrate, assume a 
creditor receives an application for a home purchase loan where the 
requested loan amount is less than the home purchase price. The 
creditor's policies and procedures must require the consumer to 
state the source of the down payment and provide verification. If 
the creditor determines the source of the down payment is another 
extension of credit that will be made to the same consumer at or 
before consummation and secured by the same dwelling, the creditor 
knows or has reason to know of the simultaneous loan and must 
consider the simultaneous loan. Alternatively, if the creditor has 
information that suggests the down payment source is the consumer's 
existing assets, the creditor would be under no further obligation 
to determine whether a simultaneous loan will be extended at or 
before consummation of the covered transaction. The creditor is not 
obligated to investigate beyond reasonable underwriting policies and 
procedures to determine whether a simultaneous loan will be extended 
at or before consummation of the covered transaction.
    3. Scope of timing. For purposes of Sec.  1026.43(c)(2)(iv), a 
simultaneous loan includes a loan that comes into existence 
concurrently with the covered transaction subject to Sec.  
1026.43(c). A simultaneous loan does not include a credit 
transaction that occurs after consummation of the covered 
transaction that is subject to this section. However, any 
simultaneous loan that specifically covers closing costs of the 
covered transaction, but is scheduled to be extended after 
consummation must be considered for the purposes of Sec.  
1026.43(c)(2)(iv).
    4. Knows or has reason to know--PACE transaction. In addition to 
the guidance provided under comment 43(c)(2)(iv)-2, a creditor 
originating a PACE transaction knows or has reason to know of any 
simultaneous loans that are PACE transactions if the transactions 
are included

[[Page 2548]]

in any existing database or registry of PACE transactions that 
includes the geographic area in which the property is located and to 
which the creditor has access.
* * * * *

43(c)(3) Verification Using Third-Party Records

    1. Records specific to the individual consumer. Records a 
creditor uses for verification under Sec.  1026.43(c)(3) and (4) 
must be specific to the individual consumer. Records regarding 
average incomes in the consumer's geographic location or average 
wages paid by the consumer's employer, for example, are not specific 
to the individual consumer and are not sufficient for verification.
    2. Obtaining records. To conduct verification under Sec.  
1026.43(c)(3) and (4), a creditor may obtain records from a third-
party service provider, such as a party the consumer's employer uses 
to respond to income verification requests, as long as the records 
are reasonably reliable and specific to the individual consumer. A 
creditor also may obtain third-party records directly from the 
consumer, likewise as long as the records are reasonably reliable 
and specific to the individual consumer. For example, a creditor 
using payroll statements to verify the consumer's income, as allowed 
under Sec.  1026.43(c)(4)(iii), may obtain the payroll statements 
from the consumer.
    3. Credit report as a reasonably reliable third-party record. A 
credit report generally is considered a reasonably reliable third-
party record under Sec.  1026.43(c)(3) for purposes of verifying 
items customarily found on a credit report, such as the consumer's 
current debt obligations, monthly debts, and credit history. Section 
1026.43(c)(3) generally does not require creditors to obtain 
additional reasonably reliable third-party records to verify 
information contained in a credit report. For example, if a credit 
report states the existence and amount of a consumer's debt 
obligation, the creditor is not required to obtain additional 
verification of the existence or amount of that obligation. In 
contrast, a credit report does not serve as a reasonably reliably 
third-party record for purposes of verifying items that do not 
appear on the credit report. For example, certain monthly debt 
obligations, such as legal obligations like alimony or child 
support, may not be reflected on a credit report. Thus, a credit 
report that does not list a consumer's monthly alimony obligation 
does not serve as a reasonably reliable third-party record for 
purposes of verifying that obligation. If a credit report reflects a 
current debt obligation that a consumer has not listed on the 
application, the creditor complies with Sec.  1026.43(c)(3) if the 
creditor considers the existence and amount of the debt obligation 
as it is reflected in the credit report. However, in some cases a 
creditor may know or have reason to know that a credit report may be 
inaccurate in whole or in part. For example, a creditor may have 
information indicating that a credit report is subject to a fraud 
alert, extended alert, active duty alert, or similar alert 
identified in 15 U.S.C. 1681c-1 or that a debt obligation listed on 
a credit report is subject to a statement of dispute pursuant to 15 
U.S.C. 1681i(b). A creditor may also have other reasonably reliable 
third-party records or other information or evidence that the 
creditor reasonably finds to be reliable that contradict the credit 
report or otherwise indicate that the credit report is inaccurate. 
If a creditor knows or has reason to know that a credit report may 
be inaccurate in whole or in part, the creditor complies with Sec.  
1026.43(c)(3) by disregarding an inaccurate or disputed item, items, 
or credit report, but does not have to obtain additional third-party 
records. The creditor may also, but is not required, to obtain other 
reasonably reliable third-party records to verify information with 
respect to which the credit report, or item therein, may be 
inaccurate. For example, the creditor might obtain statements or 
bank records regarding a particular debt obligation subject to a 
statement of dispute. See also comment 43(c)(3)-6, which describes a 
situation in which a consumer reports a debt obligation that is not 
listed on a credit report.
    4. Verification of simultaneous loans. Although a credit report 
may be used to verify current obligations, it will not reflect a 
simultaneous loan that has not yet been consummated and may not 
reflect a loan that has just recently been consummated. If the 
creditor knows or has reason to know that there will be a 
simultaneous loan extended at or before consummation, the creditor 
may verify the simultaneous loan by obtaining third-party 
verification from the third-party creditor of the simultaneous loan. 
For example, the creditor may obtain a copy of the promissory note 
or other written verification from the third-party creditor. For 
further guidance, see comments 43(c)(3)-1 and -2 discussing 
verification using third-party records.
    5. Verification of mortgage-related obligations. Creditors must 
make the repayment ability determination required under Sec.  
1026.43(c)(2) based on information verified from reasonably reliable 
records. For general guidance regarding verification see comments 
43(c)(3)-1 and -2, which discuss verification using third-party 
records. With respect to the verification of mortgage-related 
obligations that are property taxes required to be considered under 
Sec.  1026.43(c)(2)(v), a record is reasonably reliable if the 
information in the record was provided by a governmental 
organization, such as a taxing authority or local government. The 
creditor complies with Sec.  1026.43(c)(2)(v) by relying on property 
taxes referenced in the title report if the source of the property 
tax information was a local taxing authority. A creditor that knows 
or has reason to know that a consumer has an existing PACE 
transaction does not comply with Sec.  1026.43(c)(2)(v) by relying 
on information provided by a governmental organization, either 
directly or indirectly, if the information provided does not reflect 
the PACE transaction. With respect to other information in a record 
provided by an entity assessing charges, such as a homeowners 
association, the creditor complies with Sec.  1026.43(c)(2)(v) if it 
relies on homeowners association billing statements provided by the 
seller. Records are also reasonably reliable if the information in 
the record was obtained from a valid and legally executed contract. 
For example, the creditor complies with Sec.  1026.43(c)(2)(v) by 
relying on the amount of monthly ground rent referenced in the 
ground rent agreement currently in effect and applicable to the 
subject property. Records, other than those discussed above, may be 
reasonably reliable for purposes of Sec.  1026.43(c)(2)(v) if the 
source provided the information objectively.
    6. Verification of current debt obligations. Section 
1026.43(c)(3) does not require creditors to obtain additional 
records to verify the existence or amount of obligations shown on a 
consumer's credit report or listed on the consumer's application, 
absent circumstances described in comment 43(c)(3)-3. Under Sec.  
1026.43(c)(3)(iii), if a creditor relies on a consumer's credit 
report to verify a consumer's current debt obligations and the 
consumer's application lists a debt obligation not shown on the 
credit report, the creditor may consider the existence and amount of 
the obligation as it is stated on the consumer's application. The 
creditor is not required to further verify the existence or amount 
of the obligation, absent circumstances described in comment 
43(c)(3)-3.
    7. Verification of credit history. To verify credit history, a 
creditor may, for example, look to credit reports from credit 
bureaus or to reasonably reliable third-party records that evidence 
nontraditional credit references, such as evidence of rental payment 
history or public utility payments.
    8. Verification of military employment. A creditor may verify 
the employment status of military personnel by using a military 
Leave and Earnings Statement or by using the electronic database 
maintained by the Department of Defense to facilitate identification 
of consumers covered by credit protections provided pursuant to 10 
U.S.C. 987.
* * * * *

Appendix H--Closed-End Forms and Clauses

* * * * *
    30. Standard Loan Estimate and Closing Disclosure forms. Forms 
H-24(A) through (H), H-25(A) through (K), and H-28(A) through (L) 
are model forms for the disclosures required under Sec. Sec.  
1026.37 and 1026.38. However, pursuant to Sec. Sec.  1026.37(o)(3) 
and 1026.38(t)(3), for federally related mortgage loans forms H-
24(A) through (H) and H-25(A) through (K) are standard forms 
required to be used for the disclosures required under Sec. Sec.  
1026.37 and 1026.38, respectively.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-30628 Filed 1-8-25; 8:45 am]
BILLING CODE 4810-AM-P`